Federal Government Overpaid $47 Billion a Year

Guest post from the Heritage Foundation

Today, the White House is launching its second annual SAVE Award, which encourages federal employees to submit ideas on how to save taxpayer dollars. Federal employees will be able to rank the submissions submitted by colleagues, and then the general public will be able to vote on the top submissions later this year. Last year’s contest generated more than 38,000 submissions from government employees and more than 84,000 votes. Last year’s winner? A Department of Veterans Affairs employee from Colorado who suggested that VA medical centers should permit patients to take home extra bandages and medication when they are discharged. Estimated savings: $14.5 million by 2014. Not bad. But we have a better idea. How about paying federal employees what they would be worth in the private sector? Potential savings: $47 billion a year.

In March, USA Today reported that Federal employees earn higher average salaries than private-sector workers in more than eight out of 10 occupations that exist both in government and the private sector. Instead of taking the news as an opportunity to save taxpayers money, the Obama administration pushed back against the news and dispatched Office of Management and Budget Director Peter Orszag to defend government employee pay. Orszag told reporters: “I think the key thing to remember about that is the federal workforce is more highly educated than the private workforce. … Basically the entire delta between private sector and public sector federal government average pay can be explained by education and experience.” The problem is, this is just not true.

Heritage Foundation senior labor policy analyst James Sherk has just released a paper analyzing data from the Bureau of Labor Statistics’ Current Population Survey (CPS) for 2006 through 2009. The data show that even after controlling for education and experience, federal employees get paid 22% more per hour on average than private-sector workers. And that does not include the significant non-cash benefits government workers receive. Federal employees not only can enroll in a Thrift Savings Plan that works like a 401(k), but they also get a “defined contribution” plan, which lets a worker with 30 years of experience retire at 56 with full benefits. And don’t forget the Federal Employees Health Benefits Program, paid leave, group life insurance and on-site child care. To be sure, many private employers offer similar benefits but not all of these at the same time. All told, while the average private-sector employee gets $9,882 in annual benefits, federal government employees get $32,115 on average. Adding cash and non-cash compensation together, federal employees earn approximately 30 to 40 percent more in total compensation than comparable private-sector workers.

And the gravy train doesn’t end there. How much would near-absolute job security be worth to you? While their private sector counterparts have seen the unemployment rate rise from 4.2% to a high of 10.6%, the percentage of federal employees who lost jobs barely budged, going from 2.0% to 2.9%. And if “serving” in the public sector is such a “sacrifice” then why do federal employees voluntarily leave their jobs at roughly a third the rate that private sector employees do?

Why does this pay gap exist? In the private sector, productivity determines workers’ pay. Firms that overpay their employees are driven out of business by competitors that more accurately price their employees’ economic contribution. But the government is a monopoly. It has no competitors to act as a check on employee compensation. If the federal government paid market rates for their employees’ skill, education and experience, it would save taxpayers $47 billion in 2011 alone.

Not all federal employees are overpaid. The most skilled and hardest working are probably underpaid. The problem is that our government operates under a wage-fixing pay scale set by Congress. This seniority-based system divorces federal pay from individual performance. Abolishing the General Schedule system and implementing performance-based pay would go a long way toward getting taxpayers a fair deal. Reducing federal benefits and making it easier to dismiss unproductive employees would also help.