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Detroit Turns the Screws on Pensioners

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Now that Detroit is officially going bankrupt, the debate over its future hinges on how to divide the pain between the city’s creditors, a diverse group which includes both investors and city workers. Unlike some other municipal bankruptcies where pensioners saw their payments slashed to the bone, Detroit is looking to split the pain as evenly as possible.

But even modest cuts will hit pensioners extremely hard, as a new piece in the New York Times makes plain. Police and firefighters in particular were promised larger pensions in lieu of Social Security benefits. Many retired city employees are now contemplating returning to the workforce and staying there well into their 60s to keep current on their bills; many more feel that the city has broken an agreement that it had kept faithfully for decades:

Michael Wells, 65, retired in 2011 after working at the Detroit Public Library for 34 years. He said he still owed close to $100,000 on his house in Detroit, which was appraised recently at $25,000. “I’m totally underwater here,” said Mr. Wells, who is one of the plaintiffs in a union-backed lawsuit to stop the city from filing for bankruptcy and from reducing pension payments.

He said he viewed the pension as part of the overall pay he was promised. “It’s deferred income,” he said. “Had I not had a pension, perhaps I would have gotten several dollars an hour more and that would be O.K. I would have taken that money and invested it in some kind of mutual fund or stock.”

City politicians deserve a large share of the blame for pensioners’ current predicament, but some of it should also come back to the unions that set up these plans in the first place. When these pensions were first negotiated, unions swore up and down that defined-benefit pension programs were risk-free because the investment risk was on the employer, not the pensioners. But they didn’t take into account the possibility that cities can go broke too.

If retirees had defined-contribution pensions, they wouldn’t be tied down by the city’s financial problems. This isn’t to say they would be completely safe; they would still face investment risk and all the other problems that come with investing. But they would have been better able to dodge the risk of incompetent and greedy union leaders, craven politicians, and Wall Street vultures colluding in a mass scam of tens of thousands of cops, firefighters, sanitation workers and teachers.

In city after city, and state after state, we’re seeing that the mix of public sector unions and defined-benefit pension systems creates huge moral hazards and immense risks. We need to shut this racket down.

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  • Gene

    Not to nitpick, but there’s a trio to blame; the third group at fault here is the individuals who somehow believed that today’s reality could never come to pass, that their pensions really were ironclad. Now, maybe I’m heartless for “picking on the little guy,” but none of WRM’s proposed solutions for our ills can work without a higher level of wisdom (I’d settle for an uptick in skepticism) from the man in the street. Yes, everyone needs to up their game.

  • Dexter Scott

    He retired before 65 and he’s all mad that now he will have to work “well into his 60s”? Cry me a river. Most people in the private sector will have to work “well into their 60s” and will be lucky to retire at all.

  • MWFlorida

    I feel bad, but not too bad, for individuals getting their pensions reduced. They were getting above-market total compensation and they knew it. It was largely a product of a corrupt bargain where unions gave large campaign contributions to the very people who, once elected, “negotiated” with the people who bankrolled their campaigns. Imagine what happened!

  • Bruce

    An analyst on Wall Street, Meredith Whitney has been roundly criticized for predicting municipal bankruptcies that “haven’t” occurred. However, maybe they have occurred. Ms. Whitney says that governments diverted funds from basic services and infrastructure in order to pay pensions. When you do that, you are bankrupt.
    A well stated final line in this post. “We need to shut this racket down.”

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