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Bonus column:
Putting a leash on underperforming funds

Disability Dilemma

Watching for Abuse

One of the management challenges in any pension plan is the potential for abuse of disability retirement. The root of the problem, according to some, is the federal tax law, which treats certain disability pensions as tax-free income.

That could provide a powerful incentive for public employees nearing retirement age to find a way to "go out on disability." Los Angeles County just released a study by Buck Consultants that documents the potential for abuse. In New York, a 2005 Citizens Budget Committee report noted similar results there.

The problem is not unique to the public sector, but large private employers often use insurance companies or other gatekeepers to "deny, delay and defend" against questionable disability claims. The public sector, with pension boards that often include significant representation by fellow public employees, sometimes appears to have a soft spot for claimants with dubious or exaggerated claims.

Abuse of disability pensions may be worse in the 25 percent of state and local government pension plans that are exempt from Social Security. Since these plans don't pay into the federal system, they can divert a portion of their payroll into disability benefits under their own pension plans, which would allow employees to avoid federal claims-testing. From a cost standpoint, a disability pension may not add an additional burden for local taxpayers, depending on the facts and circumstances of the case and the disability pension formula. But all of us, as federal taxpayers, bear a cost when a disability retiree avoids federal income taxes on payments that would otherwise have been taxable as a pension.

One tool some public agencies are using to gain perspective on their programs is to compare their rates of disability retirements with those of other comparable public employers regionally, statewide and nationally. The Los Angeles County study showed it has a disability rate that is 50 percent higher than other California counties. Comparative data can highlight potential over-utilization of a program and avoid finger-pointing at specific individuals.

Disability rates will vary with occupations. Some jobs are more dangerous and accident-prone than others. Nobody would expect firefighters, police officers and trash collectors to have the same rate of disability as office workers. And nobody wants to deny a public safety officer rightful compensation for injuries suffered in the line of duty. Those who put their lives on the line daily deserve proper financial protection.

That said, another area where the public sector may lag private industry is in post-separation employment. In today's services economy — taking into account the Americans with Disabilities Act and low unemployment rates — there are at least some available jobs for partially disabled individuals. Helping disabled retirees find alternative work gives purpose and meaning in life to genuine civil servants and saves taxpayer dollars.

Nobody wants to be Scrooge when it comes to legitimate disabilities. Just be sure your organization audits the numbers and monitors the claims. Doing nothing could someday put you in the headlines.

Last month: Set the stage for downshifting

Index of recent columns

Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net.
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