Bracing for Pension Cuts


For decades, political and business leaders failed to set aside the right amount of money each payday to cover the pensions workers earned and, in some cases, covered up the mismanagement of pension fund investments. This is nothing short of theft, as pensions are simply deferred wages, that is, money that workers could have taken as cash in their regular paychecks had they not opted to set it aside…

Norman Stein, a Drexel University law professor who is an expert on pensions, said that if the Detroit order stands it will become standard practice to slash benefits.

“It would be a human catastrophe of the first order if pensions of vulnerable older workers can be cut whenever a local government goes to bankruptcy court,” Stein said. “We will be consigning firemen and policemen, who did nothing wrong other than protecting the city and depending on the city’s promise, into old-age poverty.”

At Newsweek, David Cay Johnson takes a closer look at the Detroit ruling lifting protections on state pensions, and explains some of the history that has led to the shortfalls all across the country. This, of course, is a huge deal for retirees who’ve worked for the city and who are now bracing for pension cuts.

Photo: Patricia Drury

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47 Comments / Post A Comment

Morbo (#1,236)

I hope all those Detroit pensioners were saving those bogus 13th checks they were getting each year.

Non-anonymous (#1,288)

@Morbo “Bogus 13th checks”? Could you elaborate?

@Non-anonymous Detroit’s general pension fund used to send out “extra” 13th checks, mostly to active employees, in order to distribute what were ostensibly excess pension returns — a total of about $1 billion over 20 years. It’s not really corrupt per se (since the money does ultimately belong to the employees; it represents the proceeds of funds they already deposited) but it’s arguably gross mismanagement on the part of the pension fund, because if that money had instead been reinvested the fund would be in slightly better shape today. The “gross mismanagement” theory is further supported by the fact that the fund also returned about $500 million of “excess” returns to the city during the same period. This article explains: http://www.freep.com/article/20131002/NEWS01/310020022/

Ipso facto, all current Detroit city employees do not deserve their pensions when they retire, nor do any other public or private sector workers, I guess?

garysixpack (#4,263)

@stuffisthings
Nope, the Detroit pensioners deserve the pensions the Detroit city government agreed to pay. The problem is, Detroit doesn’t have the money to pay the pensions. The city has obligations it doesn’t have the means to meet, and that’s why it’s declaring bankruptcy.

OTOH, I think it has been known for a long time that Detroit will not be able to meet its pension obligations, so the crisis was just a matter of time. It was also foolish for the unions and employees to negotiate for and depend upon obligations they should know are beyond what Detroit can afford.

deepomega (#22)

@stuffisthings Deserve ain’t got nothing to do with it.

Eric18 (#4,486)

@stuffisthings Does the city of Detroit deserve to remain deeply in debt because of the corruption and mismanagement of the Coleman Young and Kwame Kilpatrick administrations? Please present a viable plan for how Detroit salvages a once great metropolis while meeting every pension obligation.

P.S. I’m just including a couple of the admins in Detroit. I realize there are alot of people in their city and state government that are responsible for the mess they are in.

@Eric18 I dunno, does the United States need to remain deeply in debt because of the corruption and mismanagement of the Reagan and Bush administrations? In my opinion the answer is “yes.” They stupidly borrowed money for Star Wars and tax cuts and the war in Iraq and now we all have to pay for it, whether we like it or not, just as Detroit and Michigan residents must fulfill their contractual and moral obligations to Detroit city government retirees.

WayDownSouth (#3,431)

@stuffisthings gosh, while you named a couple of presidents who increased the national debt, you left off the one who has increased it by the biggest amount (and at least the Reagan had the collapse of the Soviet Union and Bush had the liberation of a country to show for it). Is there any particular reason that you named Reagan and Bush without naming Obama?

I am interested in your comment that the government borrowed money for tax cuts. Could you please explain that a bit more, so I understand your point? I assume that we agree that the money belongs to the taxpayers, not the government, so I’m interested in understanding more of your perspective.

As far as borrowing money for Star Wars, I think that was a very good decision. My understanding is that it was a significant contributor to the Soviet Union collapsing (which I assume that we’d agree is a good thing).

Eric18 (#4,486)

@stuffisthings Great job not answering my question.

@WayDownSouth My point is simply that, as an American taxpayer, I am still responsible for repaying debts incurred by politicians I didn’t vote for which went to activities and policies I think were misguided or downright wrong. In the same way that I have to repay G.W. Bush’s debts, you have to repay Obama’s debts. As citizens of a democracy, this is just a fact of life for both of us.

In the same way, if you don’t like public sector pensions and want everyone to be equally miserable in old age, fine. Vote for politicians who will take a hard line with the unions — as voters have done in many states around the country. That doesn’t mean you get to renege on your existing debts and legal obligations, though. Sorry!

WayDownSouth (#3,431)

It’s a very sad situation. Obviously, many retirees will be partly or wholly dependent on these pension payments and any reductions will cause financial stress. This stress can be extreme in some cases and cause significant physical and/or psychological hardship, which will be very unfortunate.

On the other hand, there are consequences of quite foolish financial planning, which seems to dominate so much of Detroit’s history. Even if we rule out corruption (which is a big assumption to make), the pension funds simply aren’t suitably funded. Politicians create generous deals with public service unions, who in turn donate and support those same politicians. Eventually the pension fund runs out of money and these problems happen.

Next will be Illinois and then California, unless significant changes are made.

Eric18 (#4,486)

@WayDownSouth Fortunately, my home state (Illinois) is starting to take steps in the right direction with the recent pension reform bill they passed. Hopefully, it’s the first of many steps to get them financially healthy. Given the corruption of Springfield and Chicago, however, I won’t hold my breath.

Let’s get the actors straight in this pension situation, OK?

First there’s the workers. “Promise” is too flippant a word for what they were offered: they entered into a legally-binding financial contract, backed by city, state, and federal law and the state constitution, whereby they gave up part of their salary to a pension fund agency which was supposed to invest the money prudently in order to pay them a fixed monthly benefit upon retirement.

There was the city government, which negotiated with the workers through their union regarding the terms of the pension, and were also responsible for setting aside the right amount of money to meet those obligations.

And then there was the pension fund managers, whose job was to take the money they got from the city, invest it prudently, and pay out the benefits workers were entitled to once they retired.

Now, where this process broke down was at the interface between the city and the pension fund managers, and within the pension fund agency itself. Basically, the city didn’t set aside the right amount of money, and in flush years (when the pension fund did well) they colluded with the fund managers to siphon the returns back into the city budget and the paychecks of current workers. This is not necessarily illegal — it is their money after all — but it is quite stupid: the whole point of long-term investing is that the extra returns you make in good years is supposed to offset the losses from bad years. If you siphon away all the extra money in the good years, you’re fucked.

The real bad guys here, in my mind, are the pension fund managers and the people who were supposed to oversee them. And this is not just a Detroit problem: this has been happening all over the country, and private companies are actually among the worst offenders when it comes to using their pension funds as a general-purpose slush fund (this is one reason some people supported the move to defined-contribution plans controlled by individual employees.)

How a rank-and-file fireman was supposed to know that the money he paid into the pension fund decades ago was being mismanaged, and that he was ultimately responsible for the consequences of the mismanagement despite everything written in city, state, and federal law, I have no idea. It used to be thought that a city couldn’t go bankrupt and the state constitution explicitly guarantees pension benefits. But I guess a responsible citizen is supposed to think, “Oh of course, I know that in 20 years the auto industry will collapse, there will be a global financial crisis, my city will become the first major American city in history to go bankrupt, and the text of the state constitution is no match for the desires of a major creditor.” That’s just standard prudent planning, right?

tl;dr version:

The Michigan constitution says pension benefits are guaranteed, whatever happens. It does not say that the taxes of wealthy Michigan residents are guaranteed not to go up, whatever happens.

A responsible state would pay for its mistake and figure out what went wrong with their oversight so it never happens again.

garysixpack (#4,263)

@stuffisthings
“How a rank-and-file fireman was supposed to know that the money he paid into the pension fund decades ago was being mismanaged, and that he was ultimately responsible for the consequences of the mismanagement despite everything written in city, state, and federal law, I have no idea.”

The rank-and-file makes sure the money is managed well by making sure union representatives are trustees of the pension. And in fact labor union trustees are a majority on the board of trustees.

“It does not say that the taxes of wealthy Michigan residents are guaranteed not to go up, whatever happens.”

Well, replace Michigan with Detroit, and you’re right. The problem is, you raise Detroit residents’ taxes, and they move out of the city to escape the taxes. So you raise the taxes more on the remainder, and still more move. And so on. You limit yourself on raising the taxes on just the rich, and you just accelerate the process.

WayDownSouth (#3,431)

@stuffisthings since you appear to primarily blame the pension fund managers, can you please identify what you mean by that term? Are you referring to the people who assigned funds from the city and state revenues to the pension fund?

From my perspective, it’s often a matter of short-term political thinking. Politicians trade longer-term pension obligations in order to get short-term political gains (e.g., political and financial support from the unions). Since the pension obligations won’t come due until after the politician leaves office, then it’s an easy solution for both sides.

The problem, of course, is that eventually the government has to start paying these pensions. And if the money isn’t there, then the pensioners are going to experience problems (as is starting to happen).

I see that the governor of Illinois said recently that he wants to revise the existing pension obligations that the state “owes” public servants. From what I read in the paper, the state pension fund is grossly underfunded and similar problems will happen there if nothing changes.

WayDownSouth (#3,431)

@garysixpack Yes, you’re exactly right about people moving to escape excessive taxation. I understand that many of the people who still live in Detroit can’t afford to move. Everyone else who could afford to get out left some time ago. And if the state government expands the borders of the areas of high taxation, people will move again, perhaps to another state. I would.

garysixpack (#4,263)

@WayDownSouth
Are there even enough rich residents left in Detroit to make a dent in the problem?

“Yes, you’re exactly right about people moving to escape excessive taxation.”

It sounds ghoulish, but I’m literally waiting for my parents to die to move out of California. The only reason I still live in CA is for my son to grow up near his grandparents.

@WayDownSouth @garysixpack It’s a lot of that, and also a bigger problem of what “prudent” standards are considered to be in the industry and how it’s been overseen. It’s a national problem that probably needs a national solution going forward.

I’m not sure what the right answer is for Detroit and Illinois, but it is disingenuous to suggest that the only two possible alternatives are cutting retiree’s benefits OR taxing only city residents to death. State and Federal bailouts should at least be on the table to avoid setting a disastrous precedent. Personally I’d support some kind of Federal version of the Pension Benefit Guaranty Corporation but I’m sure there are lots of other options other than “ooops, well, too bad for you, retirees.”

It would also be helpful if people didn’t exaggerate the scale of these problems with dodgy math that is hard for average people to disentangle (like the ridiculous claims a couple years ago that CalPERS is $500bn underfunded.)

I do agree that it’s an important issue that needs to be addressed, ideally on the national level. Personally I’d like to see more leadership on the left — and particularly from public sector unions — because right now the whole discourse is dominated by people who would basically like to see all defined-benefit pensions go away forever.

@WayDownSouth I’m also curious why you put “owes” in quotation marks. I assume that you feel that you “owe” your bank money for your mortgage or car loan or credit card debt? Or that your employer “owes” you the wages they agreed to pay you on payday? How is a pension obligation any different?

garysixpack (#4,263)

@stuffisthings
“I’m not sure what the right answer is for Detroit and Illinois, but it is disingenuous to suggest that the only two possible alternatives are cutting retiree’s benefits OR taxing only city residents to death. State and Federal bailouts should at least be on the table to avoid setting a disastrous precedent.”

Ah, yes, state and federal bailouts. Absent the bailout, union pensions are at least somewhat bound by the municipality’s ability to pay. With a federal backstop in place… va-va-va-voom! But I guess politicians will never use fat union contracts to buy votes, and city officials are never corrupt. And Robert Rizzo is still collecting his million dollar pension from jail.

@garysixpack weird that Wall Street HATES the idea of bailing out public pensions, but they’re just fine with PBGC taking over, say, airline pensions when they restructure. Does moral hazard not apply to the private sector? (The counter-argument, of course, is that private pension providers are both bound to specific standards and actually pay money for their insurance — exactly what I’d like to see happen to public pensions.)

garysixpack (#4,263)

@stuffisthings
I seem to remember pensioners take a haircut when PBGC takes over. Isn’t Detroit also just asking its pensioners to take reduced benefits more in line with the city’s ability to pay?

Eric18 (#4,486)

@stuffisthings And how exactly do they “pay” for the mistake of people like Coleman Young and others? With what money? You have a plan to force people to live in Detroit when they can just hop the border and live in one of the (relatively) wealthy counties outside of the city limits? Which is EXACTLY what has been happening for the past few decades.

I’m sure every kid in Detroit would like to play for the Red Wings, but that ain’t happening either.

Eric18 (#4,486)

@stuffisthings So…no solutions from you then except outrage at people for trying to come up with solutions?

BTW, that leadership you talk about on the left? Can you be more specific? Because for the past several decades, it has come from the corrupt machine politics in Detroit and Chicago and elsewhere. And I don’t think the unions were providing much leadership either. I think we have all had enough of that “leadership.” But happy to hear specifics on what you are talking about.

@Eric18 Quickly: A) I think the state of Michigan should bail out Detroit per their constitution; it’s harder to say everyone will move out of Michigan vs. everyone will move out of Detroit (lotta rich folks in the Detroit suburbs still, as you note. Maybe even folks who once had their trash hauled by city retirees before they fled.) B) I listed several possible solutions above C) Yes, by leadership on the left I do mean that the left needs to recognize their is a problem with pensions and come up with some kind of proactive solution, rather than denying the problem. I’m not saying public sector unions and Democratic city governments are blameless here, clearly.

garysixpack (#4,263)

@stuffisthings

“A) I think the state of Michigan should bail out Detroit per their constitution”

So if the worthy citizens of the town of Allen, MI, (population 209) vote themselves million dollar pensions, the rest of MI would be on the hook to pay for it? I wonder how hard it is to incorporate a town in Michigan.

WayDownSouth (#3,431)

@stuffisthings It’s a good question. You’re right — I didn’t explain myself clearly. The reason for the quotation marks is that the state doesn’t have the money to pay their pension-related debts to the retirees.

Let’s use your practical examples (which I agree with). Here in Australia, if I owe the bank money for a mortgage, they can take the assets that I have in order to pay the owed amount. I really do owe the bank that money and they are within their rights to sell my assets in order to get the money that I promised to pay. I don’t have a problem with this.

In this instance, though, the state or city simply doesn’t have the money. Let’s take Detroit as an example. If their pension obligations are $20b and they only have $50m, then the pensioners are simply out of luck. I don’t think they can sue the city to get any more money because the money simply isn’t there. So the reason for the quotation marks was to indicate that the debt may not matter to the city — the pensioners can’t legally enforce it.

In retrospect, I should have explained myself more clearly. I did not mean to imply that the pensioners don’t have a reasonable expectation of money due to them, but I can see how you reached that conclusion based on what I wrote.

You and I have quite different perspectives and I’m sure that we’ll have plenty to disagree about in future (and even in this thread). But we don’t have to disagree on this point :)

WayDownSouth (#3,431)

@garysixpack yes, I remember when California was a destination, rather than a departure point. Maybe the news about California focusses on the negative, but the state appears to be such a mess. My relatives who live there talk regularly about leaving, but the grandparents want to be close to their grandchildren and vice versa.

plenarilypillory (#5,270)

@stuffisthings Michigan’s constitution enshrines pensions, but the United States Constitution Article 1 enshrines bankruptcy. Federalism is beautiful.

Eric18 (#4,486)

@stuffisthings And how exactly does Michigan PAY for all those bailouts. You do realize that taxing the “evil rich white men,” even at 100%, is just a drop in the bucket when it comes to solving the state’s financial problems?

I highly suggest you read this.

http://apps.chicagotribune.com/bond-debt/

@Eric18 sorry, I don’t have time to argue endlessly about bond debt and pensions (only semi-endlessly!).

I see from those charts that Chicago had an outstanding bond debt, with interest, of $13.87 billion in 2012. Paying for spending with general obligation bonds is TERRIBLE mismanagement, agreed, but $13.87 billion in long term, low-interest debt for a city with a GDP of $571 billion per year is not exactly apocalyptic. That’s a 2.4% debt/GDP ratio, if you’re counting.

I’m sure Chicago’s 21 billionaires and 107,000 millionaires, not to mention the millions who are comfortably middle class, will have little problem paying it off over the next 30 years, especially if the city continues providing the infrastructure and education it needs for its economy to keep growing.

Eric18 (#4,486)

@stuffisthings I don’t think you understand basic math if you think the city can continue to spend irresponsibly and fund generous pensions because hey, rich people can pay for it!

OK one last thing: in Illinois and a number of other states, government employees are NOT covered by social security. Mull that one over for a second before you support cuts.

garysixpack (#4,263)

@stuffisthings
You know, when a deal gets too good, sometimes you have to stop and say, “Hey wait a minute…” The guy in the white van shouldn’t be selling his speakers, but you’re also an idiot for buying a pair. And stupidity should have consequences.

@garysixpack out of curiosity, just what do you think the average public pensioner makes per month?

garysixpack (#4,263)

@stuffisthings
No clue. I assume you will quote a very reasonable number. Just make sure whatever you quote takes into account life expectancy, total value vs original salary, the value of additional benefits (such as health insurance), and any survivor benefits (I seem to remember some deal in NY where a son can inherit a public union pension).

garysixpack (#4,263)

@stuffisthings
Also bear in mind that “average” is not a great measure of things. The average net worth of a household with Bill Gates and his 9 live-in servants is in the billions.

deepomega (#22)

@stuffisthings Isn’t the real lesson here, pensions are unreliable as fuck and probably should not be counted as real income?

wrappedupinbooks (#1,426)

@deepomega well that’s the issue, pensions are not supposed to be unreliable as fuck. Pensions are supposed to be rock-solid defined benefits, and in a properly managed and funded fund they are. It’s when you get into issues with mismanagement and underfunding that you have issues. The law firm I work for works for a variety of union pension funds (and other funds), and at many of them money is literally like water as far as paying legal fees goes, because they have the proper funding and management in place to guarantee that. We deal with bankruptcy a lot, and generally if there are disbursements from the bankruptcy estate to be made, we get them, because pensions are supposed to be prioritized. As has been discussed above, the reason that its not like this in Detroit is because a lot of people were fucking up for a lot of years, and there was no external control to come in and stop it.

Eric18 (#4,486)

As someone who lived in Chicago and Michigan for a time, I am glad that some semblance of common sense has taken root. The pensions are simply unsustainable. No amount of “outrage” from some people will change that fact. I applaud that reform is taking place and scratch my head at people who throw spitballs at attempts to solve these problems without coming up with any coherent solution themselves.

WayDownSouth (#3,431)

@Eric18 I think there are two fundamental problems.

First, governments agree to excessive pensions because they know they won’t be in office when the pensions start falling due. However, while they are in office, the same unions who receive these excessive pensions will provide financial and other support. So there’s everything to gain for both the politicians and unions by agreeing to these foolish pension terms.

Second, the states which we’re talking about (Michigan, Illinois and California) are effectively one-party states. The politicians don’t have to fear the wrath of the voters because they know that they’re going to win the election (unless they go to jail first). At a national level, the major parties swap places frequently. At these local levels, however, there isn’t a serious opposition to keep the office-holders from making these short-sighted deals.

Allison (#4,509)

@WayDownSouth Illinois is a one party state? ahahahahahahahahahahah Maybe if you separate Chicago and down state it’s two one party states?

Eric18 (#4,486)

@Allison Well, the Democrats control 4 of the six top executive positions, both the state House and the Senate, and have double the amount of U.S. reps than the GOP. As well as having an airtight lid on Chicago, by far the largest and most powerful city in the state. So yes, Illinois is a one party state.

Eric18 (#4,486)

@WayDownSouth Excellent points. And the voting public does bear some responsibility as they voted in these clowns year after year. BTW, there is a great series on the Trib that takes a look at Illinois and Chicago’s financial problems.

http://apps.chicagotribune.com/bond-debt/

Eric18 (#4,486)

A good look at how some of Chicago’s financial problems and how short sighted thinking will leave future generations on the hook.

http://apps.chicagotribune.com/bond-debt/

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