Pension Practices Angering Taxpayers

Published February 1, 2007

Recent news stories about questionable practices involving government employee pensions are creating a backlash among taxpayers and some lawmakers.

“At a time when middle-class families are struggling to meet their own retirement and health care needs, they are reading about state and local officials bending the rules of the program to increase their [own] pension benefits,” said Daniel Clifton, executive director of the American Shareholders Association (ASA).

“Moreover, a number of states are raising taxes in order to fund their pension system,” Clifton said. “Essentially, you now have a system where struggling families are reading about abuse in the system and then are told they have to pay higher income taxes and sales taxes to continue to fund this abuse. This is a clear recipe for major change at the state level.”

$100 Million in California

One of the most commonly highlighted practices is end-of-career pension increases (termed “spiking”), just one of several big problems with current government pension systems, according to critics.

Anthony Archie, a public policy fellow in business and economic studies at the Pacific Research Institute (PRI), estimates the cost of pension spiking to California taxpayers at roughly $100 million a year. He said that estimate does not include the costs of hiring and training replacements for retirees, which pushes the total cost of pension spiking even higher.

Abuse has become so widespread that a new term has been introduced to describe a certain form of fraud: “Chief’s Disease.”

The Sacramento Bee in 2004 reported about Chief’s Disease, a practice in which top-tier California Highway Patrol officers, usually near the end of their 30-year careers, aggressively pursue injury claims to inflate their retirement income.

Other forms of pension spiking include redeeming large amounts of unused vacation time or sick days shortly before retirement.

Part-Timers Cashing In

In New Jersey, one of the most common forms of spiking includes boosting pensions through additional part-time jobs. The New York Times reported on August 31, 2006 that 5,000 employees in New Jersey had accumulated substantial pension credits by working for as many as 11 different local boroughs and townships.

In some cases, “the multitude of jobs entitled employees to annual pensions worth more than $130,000,” the newspaper reported.

Examples like these are leading New Jersey taxpayers to express keen interest in reform.

As reported by the Asbury Park Press last November 12, a Monmouth University/Gannett New Jersey newspaper poll found a majority of New Jersey taxpayers want newly hired government employees to be enrolled in defined-contribution retirement plans, such as a 401(k), instead of the state’s traditional pension system, which pays benefits based on a worker’s highest three years of salary.

Gov. Open to Reform

New Jersey Gov. Jon Corzine (D) appears open to the idea. Last summer, he raised the possibility of instituting a 401(k)-type plan for new state and local government workers. While he has since put the brakes on a public employee pension reform bill, saying pension system reform should be done in collective bargaining and not legislatively, he told the New York Times in a December interview that he was willing to look at “serious restructuring” efforts.

Corzine emphasized, “It’s impossible for us to stay on the course that we are on today, and deliver what people are asking for.” (See “NJ Pension System Needs ‘Serious Restructuring’: Governor.”)

‘On the Right Track’

Clifton said he believes Corzine’s comments indicate that, on the whole, public pension reform is slowly but surely moving in the right direction.

“If even governors like New Jersey’s Corzine [a liberal with government union backing] begin discussing defined contributions in public, that tells you we’re on the right track,” Clifton said. “Eight of the last 10 changes in the states were from defined-benefit to defined-contribution plans. A system that is so wide open to fraud, waste, and abuse is doomed to collapse at some point, and with baby boomers retiring, the breaking point is reached.”

Archie, though, doubts there will be widespread government pension reform until large tax increases or cuts in government services occur in numerous states and localities.

“A switch to a defined-contribution plan [which has been occurring at private-sector businesses for more than two decades] won’t be possible until the public realizes that public employees are benefiting at their expense,” Archie said.

Good Step in California

California Gov. Arnold Schwarzenegger’s (R) December 28 announcement that he would form a 12-member Public Employee Post-Employment Benefits Commission is a step in the right direction, Archie noted.

“I applaud the governor for tackling this issue again,” Archie said. “I hope the panel thoroughly discusses all measures of pension reform, including a change to a defined-contribution plan. It would be extremely unfair to taxpayers and public employees alike if the panel didn’t analyze all the options.”

Sandra Fabry ([email protected]) is state government affairs manager for Americans for Tax Reform.