mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Detroit Rescue Plan to Gut City Pensions


City and state workers around the country think that their defined benefit pension programs are safe; after all, that’s what the politicians and union leaders keep telling them.

But to get a glimpse of what the future will look like for many people who think their retirement is assured, take a look at Detroit, where the city has unveiled a proposed solution to its debt problems that hits pensions hard.

Detroit Emergency Manager Kevyn Orr’s new plan to avoid bankruptcy was most notable for its treatment of the city’s creditors, many of whom may receive only 10 cents on the dollar for what they put in. But there’s plenty of pain to go around, and the deal will also be quite painful for the public employees and pensioners: Bloomberg reports that city worker pension plans may be slashed to the bone as the city grapples with a $3.5 billion pension debt. On top of the cuts, the city is also considering ways to shift retired workers from city-run healthcare plans to the new exchanges set up by Obamacare.

Even if the city avoids bankruptcy, it appears that public employees and pensioners will still have a tough road ahead of them. As the Detroit Free Press reports, Orr’s remarks are only adding to that perception:

Orr said that the city’s debilitating debt, a product of decades of a deteriorating tax base and generous promises to pensioners, is simply no longer sustainable. Orr said Friday that the city’s 700,000 residents deserve a city that works more than bondholders and 30,000 city workers and retirees deserve all the cash they were promised.

“The residents will be happy,” Orr said of his plan. “The creditors will be sober and rational. The employees and the retirees are going to be distressed.”

Labor leaders are not happy with the new plans, but if its any consolation, Detroit’s public workers can take solace in the fact that they are not alone. Detroit’s problems may be particularly bad, but as an excellent Economist profile of public pensions reminds us, states and municipalities from California to New Jersey are struggling with exactly the same problems. The Economist advises these governments to begin cutting their pensions now, and early signs suggest this is already beginning to happen:

Not everyone is fooled. Moody’s, a ratings agency, is switching to a discount rate based on bond yields when calculating the states’ creditworthiness. Amazingly, even under their own rosy assumptions, state pension schemes are in trouble. In Illinois they are only 40% funded; in New Jersey, 53%. As people live longer, their pensions cost more. In California, the giant CalPERS fund is requiring taxpayers to chip in more from 2015 and the CalSTRS fund for teachers needs an extra $4.5 billion annually for the next 30 years—more than the surplus the state is now trumpeting. The governor of Illinois, Pat Quinn, has called a special legislative session for June 19th to discuss pensions, after two ratings agencies downgraded the state’s debt. […]

If costs are not cut, the eventual result will be a huge rise in taxes when the pension funds run out of money. The burden will fall on private-sector employees, who do not qualify for such a gilded retirement. They will not be happy.

Public employees take heed: politicians and union leaders can and will promise you the moon, but they cannot and will not always keep their word. You are not only vulnerable to the risk of cuts to your pension through the courts; you are likely to face layoffs as cities and states cut their payrolls in a frantic effort to balance the books as pension costs hit. Losing your job won’t just affect your current income; under most defined benefit pension programs, leaving the job before retirement age will substantially reduce your future pension. 

Governments need to shift workers over to defined contribution plans as quickly as possible. The risks of the old way of doing business are just too large to ignore.

[Detroit image courtesy of Shutterstock]

Features Icon
show comments
  • bpuharic

    The American right has already gutted private sector pension plans. The war on the middle class continues as massive wealth transfer occurs from the middle class to the wealthy.

    • jfb1138

      I’m sure promising unicorns and rainbows — the invoices for which won’t come in until the promisor is long out of office — has nothing to do with it.

      • bpuharic

        No private employer ever did such a thing. It was the free market that lied to the middle class…and destroyed our savings

        • jfb1138

          I think there may be some confusion here. Free markets are what led to private employers in the first place. Before them, you worked for your owner/master/landlord or for your religious organization.

          • Corlyss

            The OWS crowd is so abysmally ignorant of economics, economic theory, economic history, and history generally that it hardly behooved one who does know one or more of the above to engage in discourse with them. You’d have more success trying to explain economics to your recliner.

          • bpuharic

            And yet it was the Tea Party crowd that gave us the biggest depression in 80 years.

            Funny how that works

          • disqus_6c7I4tK6L0

            You are trying to sound intelligent, but the sarcasm in your post screams the opposite.

          • bpuharic

            Which is pretty much the situation we have in America today. Increase in middle class income in the last 30 years?


            If we had the same income distribution 1975-2007 that we did 1950-1975, median income in this country would not be the current $50,000, it would be


          • three_chord_sloth

            Let me explain a few things to you.

            Pensions plans own roughly the same assets as the rich. Most changes in laws or policies that benefit the richest ten percent also benefit pension plans.

            Why do you think government workers sat idly by as the laws were changed to favor capital over labor? First, they are largely insulated from the wage erosion during their working years, and the increased return on investment to their pension funds ensured top drawer benefits at rock bottom prices when they retired.

            The world is far more complex than schoolboy Marxism or nostalgic trade-unionism pretends.

          • bpuharic

            Let me explain reality to you

            Few Americans have pensions, thanks to the right wing assault on the middle class. Few Americans can save for retirement, for the same reason

            I realize that, to the right, everyone who’s not a Monarchist is a marxist, but the world is more complicated than that

            We truly need a Godwin’s law for the intellectually deficients who use ‘marxism’ the way others use ‘nazi’

          • three_chord_sloth

            You are as mal-educated as you are nasty.

            You have no answers. You know no history. And you are not worth talking to. Goodbye.

          • disqus_6c7I4tK6L0

            Good. Since u really don’t have anything to say

          • disqus_6c7I4tK6L0

            Unless free markets have controls in place, all the money ends up at the top. BTW, slavery was part of America’s free market capitalistic economy. In totally free markets anything can happen and it does.

    • Corlyss

      You obviously don’t know the history of the advent of defined contribution plans.

      • bpuharic

        I’m 58. I was present at the beginning.

        Try again, this time without ignorant arrogance

        • ljgude

          Gee, I’m 70 and I thought I was there at the beginning. Maybe I’m being a little ignorant and arrogant thinking like that.

  • JDogg Snook

    “Governments need to shift workers over to defined contribution plans as quickly as possible.”

    More specifically, governments need to shift workers over to a retirement plan where money sits in private (property) accounts.

    • Corlyss

      The key to any retirement savings account is “savings.” Since the Depression Americans haven’t done a great job of that one virtue among the many that dominated our common experience before the wasteful, self-centered, hedonistic, spendthrift, grasshopper-like Boomers overwhelmed the culture.
      It’s a fact: an economy can have either savers or spenders, but it can’t have both. An economy 70% reliant on consumerism is not going to save enough for its members retirements and health care in old age. A society where the people save diligently for their old age and their health care is not going to be able to support a consumer-based world-class economy.

    • disqus_6c7I4tK6L0

      and is instead on wall street

      • JDogg Snook

        Money sitting in pension funds is already on Wall St and in far riskier investment schemes, as chronicled on this blog, than I would choose for my 401k/IRA money.

  • ljgude

    I think WRM gets it right. The Blue era welfare state, in local, state or federal government guise, planned by extrapolating unchanging conditions into a period of major disruption and change. Focusing on the changing conditions and the implications of the disruption seem to me to be the way to coming to grips with the emerging problems. Ideology – not so much.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service