The fact is that all of the money going into these plans belongs to the workers because it is part of the compensation of the state workers. The fact is that the state workers negotiate their total compensation, which they then divvy up between cash wages, paid vacations, health insurance and, yes, pensions. Since the Wisconsin government workers collectively bargained for their compensation, all of the compensation they have bargained for is part of their pay and thus only the workers contribute to the pension plan. This is an indisputable fact.
By David Cay Johnston
Pulitzer Prize winning journalist David Cay Johnston
When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees’ fight over collective bargaining.
Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles.
Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to “contribute more” to their pension and health insurance plans.
Accepting Gov. Walker’ s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.
Out of every dollar that funds Wisconsin’ s pension and health insurance plans for state workers, 100 cents comes from the state workers.
How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages — as pensions when they retire — rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.
Thus, state workers are not being asked to simply “contribute more” to Wisconsin’ s retirement system (or as the argument goes, “pay their fair share” of retirement costs as do employees in Wisconsin’ s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.
The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: “The Employer shall contribute on behalf of the employee.” This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.
The collective bargaining agreements for prosecutors, cops and scientists are all on-line.
Reporters should sit down, get a cup of coffee and read them. And then they could take what they learn, and what the state website says about fringe benefits, to Gov. Walker and challenge his assumptions.
And they should point out the very first words the state has posted at a web page on careers as a state employee (emphasis added):
The fringe benefits offered to State of Wisconsin employees are significant, and are a valuable part of an individual’s compensation package. Coverage of the controversy in Wisconsin over unions collective bargaining, and in particular pension plan contributions, contains repeated references to the phrase “contribute more.”
The key problem is that journalists are assuming that statements by Gov. Scott Walker have basis in fact. Journalists should never accept the premise of a political statement, but often they do, which explains why so much of our public policy is at odds with well-established principles.
The question journalists should be asking is “who contributes” to the state of Wisconsin’ s pension and health care plans.
The fact is that all of the money going into these plans belongs to the workers because it is part of the compensation of the state workers. The fact is that the state workers negotiate their total compensation, which they then divvy up between cash wages, paid vacations, health insurance and, yes, pensions. Since the Wisconsin government workers collectively bargained for their compensation, all of the compensation they have bargained for is part of their pay and thus only the workers contribute to the pension plan. This is an indisputable fact.
Not every news report gets it wrong, but the narrative of the journalistic herd has now been set and is slowly hardening into a concrete falsehood that will distort public understanding of the issue for years to come unless journalists en masse correct their mistakes. From the Associated Press and The New York Times to Wisconsin’s biggest newspaper, and every broadcast report I have heard, reporters again and again and again have written as fact what is nonsense.
Compared to tax, this economic issue that reporters have been mishandling is simple. But if journalists cannot grasp the economics of this issue, then how can we hope to have an intelligent debate about tax policy?
Dedicated tax journalists like my colleagues Lee Sheppard and Martin Sullivan at Tax Analysts have exposed, and explained in laymen terms, the arcane rules underlying the important tax debates and controversies that affect corporate and individual taxpayers. But the mainstream press is not even getting basic labor economics right, a much simpler matter.
Among the reports that failed to scrutinize Gov. Walker’ s assertions about state workers’ contributions and thus got it wrong is one by A.G. Sulzberger, the presumed future publisher of The New York Times, who is now a national correspondent. He wrote that the Governor “would raise the amount government workers pay into their pension to 5.8 percent of their pay, from less than 1 percent now.”
Wrong. The workers currently pay 100 percent from their compensation package, but a portion of it is deducted from their paychecks and a portion of it goes directly to the pension plan.
One correct way to describe this is that the governor “wants to further reduce the cash wages that state workers currently take home in their paychecks.” Most state workers already divert 5 percent of their cash wages to the pension plan, an official state website shows.
Gov. Walker says that he wants them to “contribute more” via deductions from their paychecks. But since the workers already contribute 100 percent of the money going to the pension plan the real issue is changing the accounting for this to reduce cash wages.
Once the state has settled on the compensation package for its workers then how the cash flows is merely accounting for how the costs are divvied up. If the workers got higher cash pay and diverted all of the pension contributions from their pay it would be the same amount compared to having the state pay directly into the pension funds.
By falsely describing the situation the governor has sought to create the issue as one of the workers getting a favor. The Club for Growth, in broadcast ads, blatantly lies by saying “state workers haven’t had to sacrifice. They pay next to nothing for their pensions.”
We expect ideological marketing organizations to shade the truth and even outright lie, as the Club for Growth has done. But journalists are supposed to check the facts, not adopt lies as truths.
Having had the good fortune long ago to train the presumed future publisher of the Los Angeles Times I focused on making sure he understood why careful checking of facts and questioning assumptions was a commercial, as well as journalistic value, for which reporters should be properly compensated because it made the paper reliable and thus more valuable to its owners. (Sadly my trainee later died and the paper was sold.)
Having worked at The New York Times I can tell you how editors might try to excuse this error. They call it “shorthand.” But shorthand that is wrong is, in short, still wrong. So, Mr. Sulzberger, take the initiative and correct your error. Doing so, you would set an example that will become newsroom lore long after you retire.
Here are some other examples of inaccurate reporting of the issue, followed by a critique and a simple solution.
Todd Richmond of the Associated Press reported on Feb. 20 that the governor wants state workers “to contribute more to health care and pension costs.” Richmond has repeatedly used variations of that phrase.
On Feb. 18, Michael Cooper and Katherine Q. Seelye of The New York Times reported that the legislation sponsored by Gov. Walker would “require workers to contribute more to their pension and health care plans.”
Jane Ford-Stewart of the Milwaukee Journal-Sentinel’ s on-line community news service reported Feb. 22 on “an effort by Gov. Scott Walker to get state employees to contribute more toward their health insurance and pensions so that the costs are more in line with contributions by workers in the private sector.”
Politifact.com has a Wisconsin operation and it was also among those that got it wrong — 100 percent dead wrong — because it assumed the facts as stated by Gov. Walker and failed to question the underlying premise. Further, contrived assumptions make it is easy for the perpetrators of the misrepresentation to point to data that support a false claim, something Politifact missed entirely, on at least two occasions, in proclaiming false statements to be true.
Given how many journalists rely on Politifact to check political assertions, instead of doing their own research, this is, by far, the inaccuracy likely to have the greatest (or most damaging effect) on subsequent reporting. (Examples of Politifact’ s inaccurate assessments can be found here and also here.)
Again, the money the state “contributes” is actually part of the compensation that has been negotiated with state workers in advance so it is their money that they choose to take as pension payments in the future rather than cash wages or other benefits today.
Next, journalists should ask how elected officials are treated by the pension system. The pay of elected leaders is set by the legislature without collective bargaining. Here it is also true that any money withheld from paychecks to fund the pension plans comes from the employee (the elected leaders) but this is not the result of a negotiated compensation package so there is a colorable argument that pension benefits that are received by elected leaders beyond the wages deducted from those employees’ compensation package are a gift from taxpayers.
The payroll deduction —- again, a mere accounting measure – – was 5 percent last year for “general participants,” official state documents show, a rate that is 56 percent higher than the 3.2 percent rate for “elected leaders.”
The rates were adjusted for 2011 and now the elected leaders pay 3.9 percent, still well below what the “general participants” collectively bargained to divert from their cash wages through this accounting device.
The rest of the money going into the plan is also wages the workers diverted, it just does not show up in paychecks as a line item, the same way that half of Social Security and Medicare taxes do not show up on paychecks, but are still part of total compensation to each worker in those plans.
I am being repetitive on purpose — experience supervising others has taught me you usually have to teach something three to seven times before it sinks in. Some management texts also make this point.
That is not to say that the state workers make too much or too little. It is to say that journalists as a class are fundamentally getting the facts wrong by not understanding compensation.
Simplistic coverage has also resulted in numerous reports that Wisconsin state workers make more than workers in Wisconsin’ s private business sector. This is true only if you compare walnuts to tuna fish.
State governments (indeed almost all governments) tend to hire people with college educations, including advanced degrees. Overall, private employers in all states tend to hire people with less education. More education means more pay because there is more skill required.
America has roughly the same number of food preparers, who can be high school dropouts, as registered nurses, who require a college education. But the nurses make on average $66,500, compared to just $18,100 for the food service workers. The food service workers collectively made less than $50 billion, while the registered nurses made almost $172 billion in 2009, my analysis of the official data shows.
Business and government hire both food service workers and registered nurses, but you are much more likely to work for the government as a registered nurse than as a food preparation worker.
When you control for the education required to be a prosecutor or nurse, government workers get total compensation that is less than those in the corporate sector. This may reflect the fact that fewer and fewer private sector workers are in unions, about 7 percent at last count. As economic theory predicts, as fewer workers can bargain collectively the overall wage level falls. Effectively wiping out public employee unions would only add to downward pressure on wages, standard economic theory shows.
On the other hand, unionized state workers run a much smaller risk of going through bouts of joblessness, an economic benefit. Numerous studies indicate that public workers, including those in Wisconsin, make about 5 percent less than private sector workers when you control for education. But what is the lifetime cost, and risk, of episodic joblessness among comparable private sector workers? Is that cost equal to 5 percent or so of lifetime earnings, which would even out the differential? I have yet to read an analysis of that issue by an academic economist, much less a journalist, so I do not know the truth of that question.
What Gov. Walker has achieved in selling a false assumption as fact occurs because journalists failed to follow what I call the first and second rules of journalism. This problem is pervasive in coverage of tax and budget issues, where so much nonsense gets reported as fact by the Washington Press corps that I have stopped filing away all but the most egregious errors — and still I copy a story or three every day to use in lectures on getting it right and not writing nonsense.
And what are these two rules for journalists?
Rule One: Check it out. Be so skeptical that if your mother says she loves you, check it out.
Rule Two: Cross check again and again until you not only know the facts, but can put them in proper context and understand all sides so well that their perspective gets proper weight and lecture, or as I like to say, everyone recognizes their oar in the water.
Deadlines may make Rule Two difficult, and often impossible, in writing the first rough draft of history. We are now in the umpteenth draft and the initial mistake keeps getting repeated, as so often happens when a big story brings a herd, until it becomes accepted as unassailable truth.
The reason that falsehoods are transformed into the public’ s common knowledge via inaccurate reporting is simple. When editors or producers back home get an account that differs from what the news herd says they raise questions and often delete unique and accurate insights. But if a reporter just repeats what everyone else is saying it usually sails unchallenged to print or airtime even when it is untrue.
Then there is this: How the compensation packages of state workers get divided up is not a matter of tax burdens. Only how much the state workers get paid is a matter of tax burdens.
There are two other important aspects to this, which go to the heart of tax policy and why our country is in for a long stay in the economic doldrums.
Traditional or defined benefit pension plans, properly administered, increase economic efficiency, while the newer defined contribution plans have high costs whether done one at a time through Individual Retirement Accounts or in group plans like 401(k)s.
Efficiency means that more of the money workers contribute to their pensions – – money that could have been taken as cash wages today – – ends up in the pockets of retirees, not securities dealers, trustees and others who administer and invest the money. Compared to defined benefit pension plans, 401(k) plans are vastly more expensive in investing, administration and other costs.
Individually managed accounts like 401(k)s violate a basic tenet of economics — specialization increases economic gains. That is why the average investor makes much less than the market return, studies by Morningstar show.
This goes to Adam Smith’s famous insight in 1776 about specialization increasing wealth: when pins were made in full by each worker each could make only a few each day, but when one person draws the wire, another cuts, another fashions the point, etc., the output rises to tens of thousands of pins and their price falls from dear to cheap.
Expecting individuals to be experts at investing their retirement money in defined contribution plans — instead of pooling the money so professional investors can manage the money as is done in defined benefit plans — is not sound economics.
The concept, at its most basic, is buying wholesale instead of retail. Wholesale is cheaper for the buyers. That is, it saves taxpayers money.
The Wisconsin State Investment Board manages about $74.5 billion for an all-in cost of $224 million.
That is a cost of about 30-cents per $100, which is good but not great. However it is far less than many defined contribution plans, where costs are often $1 or more per $100.
So, I hope that Mr. Sulzberger in particular will take the initiative to correct the inaccurate reporting and show the way to other reporters, for the betterment of both America and his family’ s investment And I hope that all reporters will start questioning the assumption in the governor’ s position instead of assuming his statements are infallible.
My larger hope is that reporters, editors and producers will apply this thinking when covering taxes and taxation, the system by which we distribute the burdens of living in and sustaining this, the Second American Republic.