Pension spiking is a method used by many public employees to significantly inflate their final average compensation (FAC) and thereby receive a larger pension. Many public pension plans allow retirees to include, among other things, overtime, longevity pay, and unused sick leave, in addition to their regular salary, when calculating their FAC. In many cases, this radically increases how much states and municipalities have to pay their retirees and is one way many individuals receive more in retirement than they ever did while working.
Suppose a Michigan State Police employee receives a salary increase of 3% every year and has a final salary of around $75,000. If he is able to double his final year's salary through spiking and his FAC is calculated using only his final two years of employment (as it currently is calculated), his pension is $22,500 more than it would be without spiking. After thirty years of retirement, this one retiree costs the government $675,000 more than it would without pension spiking. If pensions were calculated using only base salary, the state and its municipalities would save millions of dollars while still providing reasonable retirement benefits.
Pension spiking would also have much less of an effect if final average compensation took into account the last five to ten years of wages instead of only two or three. If we use the same Michigan State Police employee as in our earlier example, his pension is over $22,800 more than it would be using a ten-year calculation. Over the span of a thirty-year retirement, a two-year calculation costs the government over $680,000 more than a ten-year calculation (see the spreadsheet left). This is money that could have been spent on new employees, essential services, or pay raises for those still working.
The State Police Retirement System website includes a page detailing how employees can spike their pensions.