Association for Public Policy Analysis & Management

Defined-benefit pensions often base a worker’s retirement benefits on a short work period. This is known as the “final average salary” component in pension calculations. Often, the final average salary period is three years. Since a worker’s entire retirement depends upon this short window, there is a significant incentive for him or her to spike their salary as they approach retirement. For public school teachers, this may mean taking on additional duties or switching jobs in an effort to increase their salary just before retirement. This has important implications for plan stability and for equity among pensioners.

In this paper, I use two sources of data to estimate the prevalence of salary spiking among public school teachers in Missouri and the impact it may have on pension benefits. First, the salary schedules of 490 school districts have been collected and analyzed for systemic instances of salary spiking. Currently, school districts do not appear to be gaming the system by significantly increasing salaries at the end of a teacher’s career. The second source of data is a longitudinal data set from the Missouri Department of Elementary and Secondary Education. These data contain the experience levels and actual salaries for all public school teachers and principals from 2000 to 2015. Using these data, I estimate the difference in actual pay and the salary schedule. Additionally, I examine whether teachers earnings profiles change as they approach retirement.

Finally, using these data I compute the relative impact that salary spiking has on pension benefits. This allows me to calculate the fiscal burden that may be placed upon the pension system by pension spiking. Using school level descriptive characteristics, I identify if there are differences in the prevalence of spiking among teachers from different types of schools. From this, I offer suggestions as to pension plan design.