Pension Forfeiture and Police Misconduct


This article applies the theory of efficiency wages to public sector pension-covered workers for whom employee misconduct is most troublesome, namely state and local police. No doubt most police are conscientious professionals capable of addressing tense or inflamed situations with the proper amount of restraint, but there is also a large and rising incidence of police excessive use of force and other forms of misconduct that needs to be addressed. At the same time, state and municipal pension systems are frighteningly underfunded owing to unrealistically high rate-of-return assumptions and implausibly high rates at which liabilities are discounted, with several bankruptcies having already occurred or in process. 

This paper examines how the rules regarding police pension forfeiture for misconduct vary across states and whether stricter forfeiture might help avoid fiscal crisis. The positive questions we ask are whether stricter pension forfeiture rules can realistically reduce either (1) pension liabilities owing to the increased prospect of for-cause termination or (2) state and municipal governments’ legal liability under respondeat superior for officer misconduct. If the answer is yes to either question, the normative question is whether states can and, if so, should impose stricter pension forfeiture rules to directly or indirectly avert the looming public pension crisis. If not, the conclusion is that the use of public pensions to provide efficiency wages is severely limited, and that serious thought should be given to abandoning defined benefit (DB) plans going forward in favor of defined contribution (DC) plans, which are far less costly to administer.

Our initial and admittedly casual evidence suggests that states with stronger pension forfeiture laws experience lower rates of police misconduct. Even if stricter police pension forfeiture is found to materially reduce the incidence of misconduct, the compelling conclusion is that it is unlikely to materially mitigate the looming public pension crisis because the amount of money at stake is so small. It is plausible, however, that the indirect fiscal effect of stricter police pension forfeiture for misconduct could be substantial because municipalities across the country currently pay out hundreds of millions of dollars annually on citizen suits for excessive use of force. With police pensions contingent on good faith performance in the line of duty, it is uncontroversial that misconduct will decline as the expected losses from misbehavior increase.