“Pension Spiking” is the term used to describe the common practice whereby state and government employees contrive to boost their pensions in the last years of their employment. Since most public service employee pensions are “defined benefit” plans where the benefit is largely determined by the average of an employee’s highest three years pay, substantial increases in pay over the final three years of employment can lead to dramatic increases in retirement benefits.
Pension spiking has been going on for years throughout the country, but it has been raised to a new level in Connecticut during Gov. Dannel Malloy’s two terms. By appointing a number of loyal Democrat legislators to judgeships or other high ranking positions in his administration, he has “spiked” their retirement benefits.
Legislators in Connecticut are considered part-time employees and only make about $30,000 per year. However, they do participate in the state’s defined benefit pension plan. So, if they serve in the legislature for 35 years, they could expect to receive 70 percent of their pay or about $21,000 per year as a pension. Even though that may seem low, it compares favorably with what most of their constituents will get from Social Security.
But there is a pot of gold at the end of the legislator’s rainbow, especially if they have been a loyal Democrat in this “blue” state. If they can be promoted to a high-paying job as an administrator or a judge, they can “spike” their pension’s in just three years. One of Malloy’s first acts as governor was to appoint Andrew J. McDonald, an attorney friend and long-time legislator from his home town of Stamford, to a six-figure job as his top legal advisor. Later, McDonald became a judge on the state’s highest court.
In the most recent example, State Sen. Eric Coleman resigned his post in the state legislature just minutes before the new session opened last week. He is 65 years old and has served as a senator from Bloomfield for the past 22 years. Before that he had served in the lower house for 11 years. His combined 33 years of service would have allowed him to retire on about $20,000 per year or 66 percent of his $30,000 legislator’s pay.
But Coleman retired in expectation that he would receive an appointment to a $150,000 judgeship that he could hold until the mandatory retirement age of 70. It must be a good expectation, since he has not even been vetted by the legal board that is supposed to recommend judges. In just three years as a judge, Coleman’s average pay for pension purposes will be at least $150,000. At age 70 this pension “spiking” will enable him to retire on 75 percent of $150,000. At age 70 his retirement benefit will be about $112,500 per year, $90,000 more that he would have gotten by staying in the legislature. Although Coleman said he agonized over the decision, it was apparently a no-brainer.
He said, “As you might expect, serving in the legislature was one of the greatest honors of my life. I made a lot of good friends here… So it’s a very difficult decision, but I had discussions with the appropriate people, including my wife. I guess the ultimate conclusion is this was time.”
It certainly was a good move for him, but it will add a couple of million dollars to the State’s pension liability. At 4 percent interest it will take about $2.25 million to fund the $90,000 annual increase in his retirement benefits due to “spiking.” The state’s pension liability grows and grows, and is now one of the largest items in Connecticut’s budget.
Spiking is a non-partisan issue. At the same time as Coleman resigned from the senate, Republican Sen. Rob Kane of Waterbury resigned to take a position as Republican state auditor. He hasn’t served in the Senate as long as Coleman, but his new salary of about $150,000 will also boost his eventual retirement benefit substantially.
This year the state faces a $1.5 billion deficit and it will be forced to cut services more and more. Already cutbacks are being suggested for aid to cities and towns. Promises made to fund education, social services, and infrastructure improvement will have to be broken.
Only pension benefits will go untouched. I know that contractual obligations to public service unions are sacrosanct, but there is no contractual obligation to include legislators, judges, and high profile political appointees in the state’s pension plan. Their existing benefits could easily be frozen, and their future retirement benefits could be a combination of Social Security and a 401k type plan, the same combination that most of the rest of us have to rely on for retirement.
But as long as the governor and the legislature participate in the state’s pension plan, there can be no reform. What incentive do they have to reform a plan that benefits them so much? All they have to do is bide their time until they reach the pot of gold at the end of the rainbow.
Francis P. DeStefano, Ph.D., of Fairfield, is a writer, lecturer, historian and retired financial planner.