Pension cuts in Detroit's bankruptcy plan would be devastating and unfair
Well, the shoe finally dropped last Friday, or maybe it was a hammer. At any rate, we now know the details of Detroit’s proposed bankruptcy “plan of adjustment,” and they include pension cuts. Pretty massive pension cuts. Most pensioners would see their monthly checks cut by 34%. Police and fire retirees, whose pension fund is in better shape, lose 10%.
For many, this would be devastating. Devastating, and unfair.
There’s no doubt that Detroit’s pension funds were poorly managed. There’s also no doubt that the city was too liberal in its pension policy.
There are some folks who spent 30 years in a low-stress clerical job, and then were able to retire, move to Florida and collect a pension for life starting at age 52. That policy doesn’t make any sense even if the city of Detroit could afford it, and it never could.
My guess is that in the future, there won’t be any pensions for new city workers, just a defined contribution savings plan.
However, there’s a whole lot wrong with cutting pensions for those already retired. First, it means our government is not living up to the contract they made with these people.
They took these jobs and stayed in them, in many cases because they knew they were assured of collecting a pension.
There are other problems, too. Those collecting City of Detroit pensions get an average of $19,000 a year. If they have to take the proposed cut, that will be reduced to $12,540 a year.
Those cuts would be slightly reduced if the unions don’t protest and just sign and promise not to sue, but that isn’t going to happen, so imagine what that will do to a 90-year-old just managing to scrape by.
These cuts are also bad from the standpoint of the entire economy. When poor people have money, they don’t put it in offshore banks. They tend to spend it on necessities in their neighborhoods. This has a multiplier effect in terms of generating economic activity and stimulating growth.
It needs to be remembered that these cuts are not set in stone.
U.S. Bankruptcy Judge Steven Rhodes could reject them as being too Draconian and tell Emergency Manager Kevyn Orr to go back to the drawing board.
The bad news is that, in the end, things could end up being much worse for the retirees than this.
As I read the bankruptcy plan, this is all contingent on the state Legislature agreeing to cough up $350 million to supplement the pension fund. That’s far from a sure thing, and if they don’t, the pension cuts could be worse, and creditors may again go after the treasures in the Detroit Institute of Arts.
What should happen instead is simple.
Earlier, I said our government is proposing breaking its contract with the pensioners.
That’s true even if you have never lived in Detroit. Cities are creatures of the state. In Ohio, the state has ultimate responsibility for government pensions at all levels. That should also be the case here.
Michigan has an obligation to guarantee municipal pensions. If we believe in honesty, fairness and integrity, we can do no less.