Like much about pension politics these days, there’s disagreement on when pension perks are a wise employee retention policy, and when they cross over into pension abuse.
Experts also disagree about how much abuse there is.
Pension plans were traditionally designed to replace a certain percentage of employees’ regular pay. And traditional pensions have long reserved the biggest pay-offs for long-term employees, who typically earn their highest pay late in their careers. In these systems, pensions are typically based on an average of the last three to five years of pay.
Still, critics say some government retirement systems’ rules allow senior employees to reap bigger benefits than they deserve, helping to drain pension assets and potentially leaving taxpayers and younger employees on the hook.
One costly game is pension spiking, which can involve various maneuvers. Sometimes with the help of sympathetic supervisors or formal or unwritten rules, senior employees can cash in leave or earn bigger bonuses, overtime or promotions that boost pay just before retirement. The result: higher annual pay figures that go into calculating their pensions.
Some state and local plans have features that could make them vulnerable to spiking.
Teachers Retirement System, Georgia’s largest public retirement system, bases retirees’ pensions on an unusually short two years of earnings, making it easier for workers with a late-career pay bump to get a substantial pension boost. Educators also can buy extra years of service credit that can boost their pensions.
Meanwhile, Fultonand Cobb counties and Fulton County schools allow employees in their traditional pensions to count overtime pay and sometimes unused vacation or other pay for pension purposes.
In traditional pensions “the incentive to inflate late-career pay is very strong,” noted a 2010 study of state and local government pensions by the Center for Retirement Research at Boston College.
“The total value of a late promotion or sudden salary increase is roughly three times as valuable as the pay raise itself,” the researchers said.
Short of workers filing fraudulent time sheets and such, pension spiking usually isn’t illegal, though.
Many public pensions allowed overtime and other extra pay to count toward pensions because other employers were doing it and they needed to compete for employees, said Michael Kramer, a labor law attorney with Atlanta law firm Buckley & Klein. Others loosened the rules when they couldn’t give pay raises.
“If it’s plain language and the [pension] plan allows it,” said Kramer, “you’ll have people making sure they maximize the benefit.”
You can’t blame employees for taking advantage of the rules as they are written, said Jun Peng, a University of Arizona associate professor of public administration. “It is legitimate as long as the rules allow it,” he said.
But you can criticize poorly conceived policies, he added, that allow late-career employees to saddle a pension plan with unexpectedly large pension liabilities, or that fail to set aside enough money to cover those liabilities.
“Really, you shift the burden to other people, which is unfair,” Peng said.
To counter such games, 40 percent of the large public pensions in Boston College’s sample had adopted “anti-spiking” provisions that limit the effect of late-career pay increases, the researchers said.
Some have removed the temptation to play games by eliminating overtime from pension calculations. More are using longer periods of earnings than three to five years to calculate retirees’ pensions. Some now base pensions on workers’ earnings over their entire careers.
Ed Wall, who has been chairman of DeKalb County’s pension board for about a decade, said he has seen a sea change in attitudes about what should and should not count when determining workers’ pensions.
Not so long ago, banking a lot of overtime to boost pensions was viewed as “smart people working the system,” said Wall. “As long as the employer could afford it, they didn’t fix the system.”
But DeKalb County’s retirement system, which has lost hundreds of millions of dollars in the stock market crashes in 2001 and 2008, has stopped counting employees’ overtime toward their pensions.
“We saw a pattern of employees getting a lot of overtime in their last year of employment,” Wall said. “It was costing the pension plan.”
About the Author
