Identifying Teacher Salary Spiking and Assessing the Impact of Pensionable Compensation Reforms in Illinois

Defined benefit (DB) pension plans incentivize “salary spiking,” where sharp increases in pay are leveraged into significantly higher levels of retirement compensation. While egregious instances of salary spiking occasionally make headlines, the prevalence of salary spiking is poorly understood. Moreover, there is little guidance on the definition of salary spiking behavior and how to identify it. This paper develops an empirical method to quantify the prevalence of salary spiking by identifying cases where end-of-career compensation deviates from the expected level of compensation. We apply this method to teacher pension systems in Illinois to assess the prevalence of salary spiking before and after the implementation of a reform designed to dissuade salary spiking.

Working paper 238-0620 was originally released in June 2020 under the title "A Method for Identifying Salary Spiking: An Assessment of Pensionable Compensation and Reform in Illinois". This is an updated version, released April 2021.