Freeze the (pay)day!

December 1, 2010

Here is a bit from my Reuters Breakingviews column on the Obama federal pay freeze:

Americans are unlikely to accept austerity of any sort as long as they think Washington remains fat and happy. That’s why President Barack Obama needs to go beyond the token two-year government pay freeze he suggested this week. To get the rest of the country to committed belt-tightening more hacking and slashing is necessary.

On the face of it, U.S. federal workers seem insanely overpaid compared to their private sector counterparts. The typical federal employee in 2008 received total compensation of roughly $119,000, including $79,000 in salary. By contrast, the typical private sector worker was paid around $50,000 for total compensation of $60,000.

But those numbers are misleading since the government workforce is older and more educated. Once those differences are adjusted for, according to the American Enterprise Institute, annual compensation overpayment is more like $14,000 per worker, totaling a nearly $40 billion per year premium.

So there is room for deeper reductions than what Obama proposed, which would save $2 billion in the current 2011 fiscal year and $28 billion over five years. Just a five percent pay cut, if combined with a 10 percent reduction in the size of the federal workforce, would save some $25 billion a year.

Even that still wouldn’t make much of a dent in a budget deficit that could average a trillion bucks a year for the next ten. But it would show voters that Washington is willing to take the first hit – even if it enrages a powerful interest group in the process. It would also demonstrate a measure of governing competence to Americans before ambitious attempts are made to restructure the social insurance and tax systems.

Unfortunately, the timing of the president’s pay freeze announcement – two days before the final meeting of Obama’s debt commission – stokes speculation that panel may come up shorthanded. If that’s the case, the pay proposal, though welcome, will amount to a poor consolation prize.

The Obama debt commission also tackles this issue in its final report. It would freeze pay for three years and trim the workforce by 10 percent. How about a 10 and 10 plan, a ten percent pay cut and a ten percent workforce reduction. That could cut discretionary spending by $50 billion a year.

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