Which Job Offers the Highest Living Standard?
“The corne in an other mans ground semeth euer more fertyll and plentifull then doth oure owne”
—Erasmus of Rotterdam, 1545
A grandson of the great humanist and theologian thought he had it made when he secured a job in the Philosophy Department of Grand Valley State University. But Joe’s ability to wax eloquent about Dutch philosophy has attracted attention. He just received an offer from Boston University and is having second thoughts about spending the rest of his days in West Michigan.
Joe earns the average GVSU Associate Professor salary of $63,700. BU is offering him $81,700. This is a big differential, but Joe’s not sure it’s large enough to compensate for Boston’s higher cost of living. Joe pays $750 per month in rent in Grand Rapids. An equivalent Boston apartment costs $1,350.
This is just one of several important differences for Joe to consider. A second is taxes. Michigan’s tax rate is 3.9 percent; Massachusetts’ rate is 5.3 percent. And since federal income taxes are assessed on a progressive basis, Joe will pay proportionally more taxes at BU than at GVSU.
A third factor is employer retirement account contributions. Both GVSU and BU have generous, but quite different plans. GVSU contributes 12 percent of Joe’s salary to his 403(b) plan and requires no match. BU has a two-year waiting period to participate in its 403(b). And it requires a 3 percent employee contribution. For its part, BU contributes 5 to 14 percent of employees’ salaries depending on their age.
A fourth issue is Social Security benefits. Joe will have to pay more FICA taxes at BU, but he’ll also receive higher benefits once he retires. Of course his Social Security benefits may be subject to federal income taxes depending on the level of his other retirement income.
We used ESPlanner to help Joe make this incredibly complex decision about jobs. We entered salary, rent, and retirement account contributions for each option. The software calculates Social Security benefits. It also figures each state’s income taxes as well as federal FICA and income taxes, taking into account the deductibility of retirement account contributions and the taxation of Social Security benefits. All tax and Social Security calculations are highly detailed and are done separately for each future year.
So which school offers the highest living standard? The answer is GVSU. Joe’s annual living standard, if he stays at GVSU, is $30,734. At BU it’s $29,307.
Were Joe teaching up the road at Big Rapids, with its much less generous 3 percent employer contribution, Joe’s living standard would be only $27,828, making the BU offer look much better. But as it now stands, BU will have to pony up another $3,050 in annual salary to keep Joe even.
Of course, there’s more to life than money and Joe may decide that the attractions of Boston, particularly Fenway Park, which is inches from BU, are worth the sacrifice. But Joe’s now in a position to negotiate knowing precisely the living standard he’s being offered rather than having to guess.
Post Script: BU, which offers ESPlanner to all of its employees as a free fringe benefit, ended up splitting the difference with Joe. He’s heading East donning a Red Sox cap.