The big pay advantage in big government

When Alberta Premier Alison Redford took to the television screen the other night, she paid much attention to the revenue side of the government's books. On Alberta's massive budget deficit, the premier blamed the below-world price that Alberta-based companies receive for oil.

Nothing was whispered about past sweetheart deals with public sector unions. So for example, nothing about the education sector, where in 2011 the province itself described the five-year salary increases as "nearly double the rate of inflation." Nor did the Premier mention soaring public sector pension costs.

Perhaps the provincial government should see a credit counsellor. They might tell Premier Redford that balanced books are not just about the money coming in, but the money going out how much you spend.

If someone who normally earns $50,000 per year is awarded a one-time $20,000 performance-bonus, they would be foolish to expect the same again, to spend $70,000 in the following year in anticipation of another year-end windfall.

But that's exactly what consecutive Alberta government have done for years.

Per capita program spending rose to $10,526 in this current budget year from $6,825 in 1996/97. Those figures account for inflation and population growth, and are a 56 per cent jump in real terms.

A good chunk of the new spending has gone to the public sector. This time last year, a University of Calgary report found that 95 per cent of the increases in provincial revenues in the previous decade were swallowed up by Alberta's public sector.

Is all that extra spending justified? Not really. To understand why, consider a report from my colleagues Amela Karabegovic and Jason Clemens. Based on Statistics Canada labour force data, they discovered the average public sector worker in Alberta earns a 10.3 per cent wage premium compared to their private sector counterpart.

That 10.3 per cent premium was calculated after accounting for private and public sector differences in terms of career length, tenure, higher average education levels in the public sector, and other relevant factors. (Studies that don't account for such factors show much larger public sector wage premiums.)

The report also found that public sector workers in Alberta will retire, on average, two years earlier than those in the private sector.  In addition, such workers have much better pension benefits.

In 2011, 81.4 per cent of Alberta's public-sector workers were covered by a registered pension plan (and 97.2 per cent of them possessed a defined benefit plan).

In the private sector, just 21.5 per cent of workers were even covered by a registered pension plan; less than half of them (just 43.5 per cent) were in a defined benefit plan.

Or expressed another way: In the private sector, fewer than one in 10 private sector workers have a defined benefit plan; that compares to (roughly) eight in 10 workers in the public sector who have guaranteed retirement benefits. But the former pay for the latter.

At this point, some will argue that because public sector employees also pay taxes, none of this matters. Wrong. That's akin to an employee telling their employer that if he is awarded a 10 per cent raise, but contributes back one percent, he has in fact "contributed" to his raise.

That illogic ignores the significant extra cost to the employer, or in the case of the provincial treasury, to taxpayers.

There’s a reason for the above disparities. In the private sector, businesses pay market salaries and benefits: Pay above-market and you quickly become cost uncompetitive and ultimately flirt with bankruptcy; conversely, go cheap and you lose workers.

On pensions for example, many companies rightly fear the “GM legacy” effect. That’s where a company promises a certain level of benefits decades from now but which can bankrupt companies. (That just happened to Hostess, the maker of “Twinkies”).

That’s why ever-fewer companies offer defined benefit plans. Instead, the private sector trend is to defined contribution plans where benefits are based on what’s affordable for everyone and pension benefits are (realistically) based on investment returns.

In work paid for by taxpayers, there is no natural check on pay or pensions because politicians too often think taxpayers can be shanghaied into paying even more tax, and governments as an entity rarely face the threat of bankruptcy.

To be fair, the deal between taxpayers and the broad public sector should go both ways. When total compensation (whatever the mix of pay and pension benefits) is higher than the private sector, politicians have a duty to get such costs in line with private sector realities and what taxpayers can afford.

Similarly, where public sector work is underpaid relative to the private sector, public sector unions are on solid ground to ask for increases. At present though, and on average, that’s not the reality in Alberta.