In February the Ohio Public Employees Retirement System Board of Trustees voted to adopt a measure in part to address the practice of spiking one’s final average salary to receive higher retirement benefits.
The chief tool proposed by the OPERS Board is what we call the contribution-based benefit cap. It considers the member’s career contributions toward his or her pension, in addition to the final average salary, in determining one’s annual benefit.
Many of our members have responded to our social media discussions of this benefit cap by asking for more examples. We hope the following examples provide clarification of this issue. As we stated in the first blog on the subject, if the cap had been in place, it would have applied to only 2 percent of new retirees from 2006-10.
We repeat: The contribution-based spiking proposal will not impact members who have had normal raises and promotions throughout their careers. Rather, it is meant to temper benefit payouts that are out of line with a member’s career contributions that ultimately are subsidized by other members.
It is important to remember that this proposal requires the passage of legislation by the Ohio General Assembly prior to implementation.
The following examples help explain the benefit cap, and show that the cap only applies in unique circumstances with fact patterns that do not represent the typical career for public sector workers. In addition, there are two graphics below that illustrate the examples.
For purposes of these examples, certain assumptions have been made: the members began public service at age 23 and worked for 32 years.
- “Al Steady”: This member received annual salary increases over his career and never was promoted. His five-year FAS was $37,481, and the accumulated contribution that represents his pension contribution, plus interest, was $85,325. Thus, Al would receive an uncapped annual pension benefit of $26,387.
- “Bea Drop”: Bea worked for 22 years with a starting salary of $50,000 and annual raises, making over $100,000 in her last few years. Then, she moved into a part-time job with a pay cut to $13,938 and earned 4 percent annual raises for 10 years thereafter. Even though she had the salary drop and moved to part-time status, her annual pension benefit of $74,275 would be uncapped because of her high level of employee contributions over time compared to her final average salary of $105,505.
- “Carl Ladder”: Carl received annual increases. But he also received a promotion every five years. He received a pay increase of $20,000 with each promotion, so his compensation chart looks like a stair step. Carl ended his career with a high salary ($231,082), but because of his significant contributions, he retired with an uncapped benefit of $147,385.
- “Dan Spike”: Dan began his career with a salary of $12,000 and was earning a modest annual raise of 1 percent for 22 years. Then, he moved into a job that paid $100,000 more than his then-current salary of $14,789. That compensation spike later resulted in a benefit cap. Even though he worked for 10 years at the higher salary, his benefit would be capped at $68,481 instead of the projected $86,648 because his contributions were out of line with his FAS.
- “Erin Jump”: Like Dan, Erin began her career making $12,000 in salary and received modest, 1 percent, raises each year for 27 years. Then, in the last five years of her career, she “jumped” to a new job paying $100,000 more than she was earning. Because of this change, her lifetime contributions were actually less than her five-year FAS. Her annual benefit would be capped at $44,199, instead of the $82,986 she would have received without the contribution-based benefit cap.
The contribution-based cap proposal would not have a transition plan, so it would apply equally to members of Groups A, B and C who have not contributed enough in employee contributions upon retirement.
We hope that these examples help to illustrate that the proposed benefit cap, and that the issue only applies to a small subset of our membership. Members who are able to spike their final average salaries have their benefits subsidized by members who do not spike, and this cap helps to control that disparity.
The practice of spiking is often cited by observers as a significant issue for public pension funds. It requires a legislative solution.