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- Title
CURBING THE INCENTIVE FOR PENSION PADDING: CORRECTING THE EMPLOYER CONTRIBUTION MISMATCH.
- Authors
Elghanayan, Jacob N.
- Abstract
An often overlooked issue in the debate over New York's runaway pension costs is the practice of pension ?padding? or ?spiking,? whereby a public employee works overtime during his final years of employment, inflating his total compensation during his peak-earning years and, more significantly, distorting his pension calculation. In the most egregious examples, this practice results in some employees receiving pension benefits that exceed their salary during their final year of employment. While legal--and indeed protected for current employees by the nonimpairment clause of New York State's Constitution--pension padding contributes to unsustainable pension costs and incentivizes structural abuse of the pension system. To date, most reform efforts have focused on limits to employee benefits, but these reforms fail to address the following fundamental mismatch: An employee's benefits are calculated based on his final three years' salary, whereas the employer's costs are calculated based on the employee's total lifetime salary. Whether as part of an implicit or explicit understanding between certain public employers and employees, or simply an overlooked quirk of New York's pension system, employers lack the requisite incentive to reduce overtime while employees have every incentive to work overtime (maximizing their pay) during the years in which their pension benefits are calculated. Stated simply, employers do not bear the costs of their employees' increased benefits. This article proposes an alternative reform that assesses employer contributions to the public retirement system on the same final three years' salary that is used to calculate employee pension benefits, thereby aligning the interests of public employers with those of New York's taxpayers. As an additional advantage, this reform could be immediately applied to all current public employees and survive a challenge under the nonimpairment clause.
- Subjects
PENSION costs; CIVIL service pensions; OVERTIME laws; OVERTIME pay; NONQUALIFIED pension plans; QUALIFIED pension plans
- Publication
Albany Law Review, 2014, Vol 77, Issue 1, p149
- ISSN
0002-4678
- Publication type
Article