Overtime in Pension Calculations: A Thing of the Past?

One of the components of the pension reform debate that is sure to catch a lot of people’s attention is whether public sector workers should be allowed to count overtime into their pension calculation. Since defined benefit plans count earnings over a certain period of time to determine pension payout (like 50% of average salary from the last three or four years prior to retiring) there is a tendency to "spike" earnings. Simply put, the worker will work as many hours as possible near the end of his/her working years in order to sweeten the pension.

Two efforts are underway to change this practice. In the City, the only union that has overtime included in their final salary calculation is the firefighter union. Under the Act 47 amended plan, the negotiations of the new contract (the current one expires at the end of the year) will include a provision that any firefighter hired after December 31, 2009 will no longer have overtime included in their pension calculation. According to the Act 47 team this provision will put the firefighters on the same playing field with the other public sector bargaining units in the City. It will be incumbent upon the City’s negotiating team to ensure that no union wins this provision back in upcoming or future negotiations.

At the state level, there is legislation pending that would affect counties of the second class (Allegheny) and the second class A (Bucks, Delaware, and Montgomery) that would likewise eliminate overtime pay for all types of employees in these counties for those hired after the effective date of the legislation (60 days after its passage).

Should both efforts succeed, it would represent a small but significant step toward larger pension reform in the state. Locally, it would mean that no City or County employee would be able to use overtime in pension calculations, certainly a measure that brings some uniformity to post-retirement benefits.