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.