Pension Spiking

| Tue Mar. 8, 2011 6:10 PM EST

Karen Tumulty writes in the Washington Post today that most public sector workers get fairly modest pensions:

What makes headlines, however, are the stories of workers who exploit the loopholes....Some public employees end up getting paid more in retirement than they did during their working years, thanks to pension-benefit formulas that encourage practices such as "spiking," the inflation of salary and overtime payments in the final years before retirement.

"I've never understood why public employees themselves haven't policed these abuses, because it hurts everyone when they come to light," said Alicia Munnell, the director of Boston College's Center for Retirement Research.

Last year, New York's then-Attorney General Andrew Cuomo — now the governor — investigated pension-padding and found cases where government employees who had never worked overtime in the early years of their career clocked more than 1,000 hours of it as their retirement neared. Cuomo said the abuse transcended "occupation, region or job title."

New York City Mayor Michael Bloomberg in January proposed banning the practice, but only for new employees. Unlike private employers, state and local governments are generally prohibited from changing the retirement benefits that they have already promised current workers.

Anyone who's serious about pension abuse should focus like a laser on spiking. Unions are wrong to defend it, and if Democratic politicians back them up on it, then they deserve all the public abuse that Republicans are able to hang on them. It's a bad practice and an indefensible one, and it ought to be an easy bipartisan target.

But I'm curious about the fact that "state and local governments are generally prohibited from changing the retirement benefits that they have already promised current workers." It certainly makes sense that basic benefit levels can't be changed once they've been agreed to and workers are counting on them, but can it really be the case that even something like spiking can't be changed when contracts are up for renegotiation? Or at least limited? Is this due to state law, or is it something mandated by the courts? I'll try to check into this.

In any case, surely states and local governments can crack down on this if they want to by simply not approving overtime for workers who are close to retirement? Or approving it only in limited amounts and with the approval of someone fairly high up the food chain? I'm not sure what would stop them from doing this. It's a collective action problem, to be sure, but not an impossible one to address.