Public Employee Pensions and Pay

Last month, Rhiannon Jerch, Shan Li and I released a NBER Working Paper studying the cost of moving a public sector bus one mile and how this varies across cities and over time.    We argue that this standardized government service measure offers a useful “measuring rod” for comparing government efficiency in providing basic services.

Here is the abstract for our paper;

“Local governments spend roughly $1.6 trillion per year to provide a variety of public services ranging from police and fire protection to public schools and public transit. However, we know little about public sector’s productivity in delivering key services. To understand the productivity both over time and across space, we examine public bus service, which represents a standardized output for benchmarking the cost of local government service provision. There is significant dispersion across transit agencies in the operating cost per bus mile with the highest being more than three times as high as the lowest among top 20 largest cities by population. We estimate the cost savings from privatization and explore the political economy of why privatization rates are lower in high cost unionized areas. Our analysis finds that the full privatizaton could result in cost savings of $5.7 billion in 2011 and that the gain in economic efficiency from more closely aligning bus fares with production costs would be worth at least half a billion dollars.”

Now, I’m starting to think more about public pension generosity across the U.S.   Stanford’s Jonathan Rauch has done some of the big work on this topic.  Here is a citation to his 2014 AEJ paper.    His abstract quickly reveals the policy challenge.

Abstract

We calculate increases in contributions required to achieve full funding of state and local pension systems in the United States over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1 percent of the total own revenue generated by state and local governments. This represents a tax increase of $1,385 per household per year, around half of which would go to pay down legacy liabilities while half would fund the cost of new promises. We examine sensitivity to asset return assumptions, wage correlations, the treatment of workers not currently in Social Security, and endogenous geographical shifts in the tax base.

Citation

Novy-Marx, Robert and Joshua Rauh. 2014. “The Revenue Demands of Public Employee Pension Promises.” American Economic Journal: Economic Policy, 6(1):193-229.

A $1400 per household per year tax?  If the next Democrat President seeks to introduce a carbon tax will she also introduce this tax?  Or will the 1% be taxed with progressive taxation to retire this huge tax bill?  If 1 in a 100 pay this tax, then this would be an increase in taxes of $140,000 per 1% household per year to retire this debt.    Public finance may make a comeback as a field of study and debate.