Pension fraud comes in several forms. Since nearly a third of older Americans receive a pension – and collect a median of $36,270 in annual income this way, according to the Pension Rights Center – it’s important that this source of retirement funding is protected against abuse.

The best way to learn how to spot pension fraud is to know what types of pension fraud exist and which ones might affect you. Then you can take steps to avoid them or report them – and possibly make backup plans to fund your retirement so that you’re not entirely reliant on a potentially shaky pension.

See if you – or a loved one – fit into any of the following categories. It's also important to note that sometimes the fraud is committed by pensioners themselves, which could leave their co-pensioners with less money for retirement.

Employer Pension Fraud

Employers can commit pension fraud in several ways. They can fail to fund pensions, they can mismanage pension investments or they can miscalculate employees’ pension benefits. 

In addition, when a business starts struggling but hasn’t yet failed, some employers “borrow” from their employees’ pension fund or skip required contributions in order to pay other business expenses. This type of fraud is called “pension dipping,” and it’s a federal crime that can lead to jail time as well as tax penalties. 

Also illegal: When employers rely on company stock to fund the pension. As FINRA (the Financial Industry Regulatory Authoritypoints out: "The Employee Retirement Security Act of 1974 (ERISA) restricts traditional pension plans (also known as defined-benefit plans) from investing more than 10% of assets in company stock." The danger: This failure to diversify properly can leave the pension worthless if the company goes under. 

The Pension Rights Center has published a list of multiemployer pension plans that are in serious trouble and that are eligible to reduce benefits to retirees. Nearly 1 million union members could be affected by these underfunded plans. Under federal law, plan participants should receive written notice of their plan’s pending insolvency, but it’s a good idea to check the list to make sure your plan isn’t on it.

Pension Fraud by Nursing Homes

Nursing home workers can swindle pension income from residents, especially those who are mentally impaired or not financially savvy. One way this can – and has – happened is when residents deposit their pension checks into an optional resident trust fund that lets the nursing home pay their bills. While this arrangement might sound convenient, it creates a greater opportunity for theft by unscrupulous nursing home employees. Other times, pension checks mailed to residents can simply be stolen and fraudulently cashed, especially if the resident isn't carefully tracking the mail.

Giving a trusted relative or friend power of attorney over the resident’s finances can make him or her less of a target since nursing home workers will know that someone else is watching  that person’s finances. Having pension payments directly deposited to the resident’s bank account, rather than being sent by check, can help prevent pension checks from theft. (For related reading, see 5 Ways to Protect Pensions from Nursing Homes.)

Pension Fraud and Veterans

According to the U.S. government, some dishonest financial advisors, attorneys, insurance agents and people pretending to be veterans' service officers volunteer help with pension paperwork to veterans who are 65 and older. In this role, they persuade them to make poor choices that separate them from their money or cause them to lose Medicaid eligibility. 

Another scam involves helping veterans who aren’t eligible for a pension to unwittingly commit pension fraud by moving their assets around. Once caught, the veteran ends up owing thousands of dollars to the government, which may be difficult to repay.

Scammers also cold-call veterans and charge them fees for pension assistance when legitimate pension help is available to veterans for free through VA-accredited organizations. Veterans can make sure they are getting legitimate free help by visiting the Department of Veterans Affairs accreditation lookup.

Employee Pension Fraud

Individuals may also do illegal or unethical things to increase their own pension benefits. These actions hurt everyone who participates in their pension plan. Pensions are funded with the expectation of paying a certain level of benefits. Whenever employees violate those expectations by trying to claim more benefits than they are entitled to, less money remains in the pension to pay everyone else.

Here are a few examples. In Massachusetts, a former police lieutenant used sick leave from one job to work at a second full-time job and unjustly inflate his pension benefits – an abuse of taxpayer funds and public employment benefits. While the court found that his conduct had not been illegal under existing laws, the case resulted in reform to prevent such abuses from occurring in the future. In another Massachusetts case, a district fire chief sought to inflate his pension benefits by claiming a higher accidental disability retirement pension for an injury that appeared to be exaggerated or nonexistent. He, too, was found not guilty of violating any law, but his case also lead to pension reform. 

Employees also commit pension fraud by submitting falsified records, such as falsified birth and marriage certificates, divorce decrees, medical records and accident reports. Survivors of beneficiaries sometimes lie on the annual affidavits pensions send out to confirm that the beneficiary is still living so the survivors can continue to collect benefits illegally that they aren’t entitled to. Public workers who are retired and receiving pensions also sometimes violate earnings limits when they continue to work in another public sector job during retirement. 

The Bottom Line

Pension fraud is a serious problem that potentially affects millions of retirees nationwide. If you suspect you are a victim of pension fraud, you may wish to report the fraud to the U.S. Office of the Inspector General, your state government (which may have a department dedicated to fraud), the Employee Benefits Security Administration or your local U.S. attorney. Other options include the person in charge of your employee benefits and the local police. You may also wish to contact a pension fraud attorney for assistance, especially if your job might be at risk or you are worried about any other form of retaliation for being a whistleblower.