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How overtime pay can spike workers’ retirement benefits

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Overtime wages factor into a worker’s retirement, and it’s possible that employees can volunteer for huge amounts of overtime in their final years to glean higher retirement benefits that will last the rest of their lives.

It’s called spiking, and the state has recently put safeguards in place to prevent it.

As of July 1, pensions paid by the Iowa Public Employees’ Retirement System are based on the average of an employee’s highest five years of pay. That move to an average of five years of pay instead of three was put in place partly to help prevent spiking.

Iowa’s state retirement system has a $5.9 billion long-term shortfall, a state consultant said last week.

There are additional anti-spiking rules. One test, for example, sets a so-called “control year” that is designed to place further restrictions on how excessive wages are figured into a worker’s retirement benefits. That works by using an employee’s sixth-highest year’s salary as another base, which is compared with the five-year average.

Adjustments are made if the five-year average is more than 134 percent of the control-year’s salary. But even that is not foolproof, said Donna Mueller, the CEO of the state pension system. A determined employee can work six consecutive years with large amounts of overtime and get around the safeguards, she said.

“No program is fail-safe,” Mueller said. “I don’t think we can absolutely prevent it … but I think we’ve done one of the better jobs among public systems for finding ways to control spiking.”

Still, the Register’s analysis of state data shows that it is employees nearing retirement who are collecting eye-popping overtime wages. For the eight state employees paid $150,000 or more in overtime during the past four years, the average age is 59 years old. For the 10 employees paid the most overtime in the most recent fiscal year, the average age is 58.

Pam Manning, who worked for 25 years for Glenwood Resource Center, said she had worked large amounts of overtime consistently throughout her career but was also aware that the overtime would boost her state retirement benefits. She said the retirement boost was an added benefit for the long hours she worked.

“The overtime was nice,” Manning said.


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