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Detroit proves not even pensions are safe anymore

In the landmark Detroit bankruptcy case this week US Bankruptcy Judge Steven Rhodes said words that could forever change the way American pension plans are viewed. According to Rhodes, “Nothing distinguishes pension debt in a municipal bankruptcy case from any other debt.” This statement was part of a larger statement about the financial status of Detroit: their bankrupt. But what it could mean for you, if you are living on a pension, could be much more serious.

It is only thirteen words, but this bankruptcy ruling could send what the New York Post calls a “seismic shockwave” through cities far outside of Detroit. What this could mean is that pension plan debts, once thought to be protected in bankruptcy, could be considered like any other debts and pensioners may be left settling for payments which are pennies on the dollar.

What does it mean for retired workers or those near retirement?

Lowered pension payments are a bitter pill to swallow, especially if you are close to retirement. You may get much less money than you thought you would get. It also means that you may not be able to return to work to make up the difference in the lost funds.

But who should get the blame? Most of the blame in Detroit has been put not only on the Judge but also the mayor, the governor and the city’s emergency manager, not to mention city officials. But some argue the ire should be directed a little closer to home- directly at the unions.

Not only did the state pass a constitutional amendment to protect pensions, the unions continued to make demands that could not have possibly been funded, especially with the sudden financial decline of the city.

City and state governments have also been slow to do what the private sector did over fifteen years ago- move away from guaranteed pension benefit plans to plans where the workers are forced to contribute, think 401k plans. This eliminates some of the risk of unfunded liabilities.

I remember in 1996 when I started working at Verizon, previously called GTE, after two months of employment they eliminated the cushy pension plan and moved to a contributory plan (at least for the little guys like me. Something tells me the “big wigs” kept their nice plans).

How did this happen in Detroit?

Unions have always had political clout in the city of Detroit. They assumed that taxpayers would continue to fund their irrational plans and pay any liabilities which were not funded. What they didn’t count on is taxpayers saying ‘no thanks’ and leaving the city in droves. Taxpayers have grown weary of funding benefits for public workers while struggling to pay their own healthcare and retirement expenses.

What needs to be done with pension plans?

Cities across the United States should start investigating new ways to protect their workers. The days of the defined pension plan seem to be nearing an end. The private sector figured this out years ago.  But cities have been slow to react to the changing financial environment. Maybe it’s because cities didn’t think they needed to change, and Detroit didn’t figure a judge would breach something as sacrosanct as pension benefits, but guess what? He just did.
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