While much has been made of the impact of pension “spiking,” it is helpful to quantify just exactly how much pension spiking will cost taxpayers, and how ill-prepared an otherwise adequately funded pension account is for this practice. In the two sets of examples below, the same assumptions and the same analytical model is used as in the previous post “What Percent of Payroll Will Keep Pensions Solvent?“; 30 years working, 25 years retired, pay in real dollars doubling between the hire date and the retirement date, and various rates of return.
In this analysis, each block of data has three rows. The first row shows the amount by which the final pay is “spiked,” i.e., increased by a disproportionate amount through a large pay raise, cashing in of accumulated sick time, or other methods that increase pay more than it would ordinarily increase. The second row shows how much would have to be set aside as a percent of payroll each year and contributed into the employee’s pension fund, in order to ensure the fund would have sufficient assets to pay out the calculated retirement pension for 25 years. The third row puts this another way, by showing how much money would need to be in the employee’s pension fund at the time they retire. There are three sets of three rows, representing the results under three different return on investment scenarios; a 4.75% rate of return over the [...] Read More