Pension spiking, sometimes referred to as "salary spiking", is the process whereby public sector employees grant themselves large raises or otherwise artificially inflate their compensation in the years immediately preceding retirement in order to receive larger pensions than they otherwise would be entitled to receive. This inflates the pension payments to the retirees and, upon retirement of the "spikee", transfers the burden of making payments from the employee's employer to a public pension fund. This practice is considered a significant contributor to the high cost of public sector pensions.
Several states including Illinois have passed laws making it more difficult for employees to spike their pensions. The California CalPERS system outlawed this practice in 1993, but as of 2012 it remained legal in the 20 counties which did not participate in this public employee retirement system.
Pension spiking is largely seen in public sector and is an example of the principal–agent problem. In the classic principal–agent problem, a principal hires an agent to work on his behalf. The agent then seeks to maximize his own well being within the confines of the engagement laid out by the principal. The agent, or bureaucrat in this instance, has superior information and is able to maximize his benefit at the cost of the principal. In other words, there is asymmetric information.
In the case of pension spiking the general public (the principal) elects officials to hire the bureaucrat who then hires the public servants, who are the ultimate agents of the general public. Thus, the principal is three steps removed from the bureaucrat. In the case of pension spiking, the public has allowed a pension system to be created which is based on the compensation in the last year of service and delegated the setting of this cost to the bureaucrat. The bureaucrat, who will often himself or herself benefit from a spiked pension or the same laws permitting pension spiking, fails to stop the practice, a clear conflict of interest.