One of the most immediate and painful results from the forthcoming bankruptcy of Detroit (no doubt followed by any number of high-spending population-declining US cities) is the plight of public sector pensioners. Since they are paid out of current city funds, once the city is bankrupt their pensions are worth pennies on the dollar:
Detroit Emergency Manager Kevyn Orr wants to reduce pension benefits for thousands of retired and current city employees. In its Chapter 9 bankruptcy filing, the city claimed $3.5 billion in underfunded pensions. That's nearly 20 percent of all of the city's total debts of $18.5 billion.Not included in that $3.5 billion is another $3 billion or so in retirement health benefits. Over 1/3 of Detroit's debt relates to current and future pensioners. It seems that the city was relaxed about pre-funding pension and health benefits, preferring to pay them out of annual taxation - which came a little unstuck when companies, jobs and taxpayers fled the city, slashing tax revenues.
Luckily for us, Helaine Olen has analysed the collapse of Detroit and drawn the appropriate lessons for prospective pensioners, blaming the 401(k) which is roughly equivalent in tax treatment to a UK personally funded defined-contribution pension plan:
However, the Reagan administration expanded the 401(k) allowing companies to offer the benefit to all employees. That's when the corporate bean counters stepped in. Realizing the 401(k) was cheaper on the company bottom line than traditional defined benefit plans, they began to freeze traditional pensions, and force workers to take full responsibility for their own retirement planning.Helaine seems (the logic is fuzzy here) to claim that if only companies had kept their workers on defined benefit pensions - thereby shifting all the risk to their employing company or city - and eschewed the 401(k) defined benefit plans, things would all have been rosy:
Pensions are not only more cost effective than the 401(k), they work better for the majority of people. With a pension, we don't have the responsibility of guessing the right amount of money to save and how to invest it so it will grow to the right amount.Mmm. Like the pension holders of Detroit, Stockton, and presumably soon Chicago, Sacramento, Los Angeles have benefitted from this approach. The reason that government pensions have been better (up to now) than 401(k)s is that 401(k) plans make clear just how much money you have to save in order to have a relatively miserly income. The connection between your government pension contributions and payments is, at best, tenuous. You are relying, each year, on the government bringing in enough money from taxpayers (less all the salaries and infrastructure spending that they can't do without unless they want to hang from lamp posts) to pay for your pension and healthcare. Because pensioners are living longer and healthcare costs are ever-increasing, this will be a rapidly increasing total pension and healthcare bill. As soon as the taxpayers have had enough of contributing 50%+ of their taxes direct to your pension and healthcare, and decide to move elsewhere, where is the money going to come from?
Oddly, Helaine seems to skip lightly over the question of where the money to fund government pensions comes from. I wonder why?
After more than thirty years of the 401(k) era, we no longer view pensions as something we must obtain for ourselves. We repeatedly tell pollsters we wish we had them but when it comes down to it, we don't protest when yet another group sees theirs cut or jettisoned entirely.Perhaps because we realise that in many cases we're paying for that group's pensions in our taxes, while trying desperately to save a tiny amount of pension for ourselves out of the remnants of our income?