By: William McGurn
New York Post
December 6, 2013
Nothing distinguishes pension debt in a municipal bankruptcy case from any other debt.”
These thirteen words come from a ruling this week by US Bankruptcy Judge Steven Rhodes. In strictly legal terms, they’re part of a larger decision that does little more than confirm the obvious: Detroit is bankrupt.
But make no mistake. The judge has set off a seismic shock that will reverberate far outside Detroit. For he has confirmed something fairly radical in the world of public employees: the law applies to workers for a bankrupt city much the same way it does to workers for a bankrupt company.
Even for those who think this common sense has been a long time coming, it’s a tough hit for Detroit city workers at or near retirement age. Not only does it mean they’ll get less than they were promised, the news comes late in their lives, at a time when they have little way to make up for it. And they won’t be the last, given the unfunded pensions across this country.
In Detroit, much of the ire from city workers has been directed at Judge Rhodes. That’s misplaced. A far better target would be their own unions.
For years, public-workers unions have behaved as though their cities’ financial and pension crises aren’t their problem, largely because they’ve deemed their pensions as sacrosanct. In Michigan this sense of unreality was encouraged by a state constitutional amendment (similar to one in New York) which the unions and the political class took as a guarantee that pensions couldn’t be touched even if the city went belly-up.
Now, the economic solution to the pension mess isn’t that complicated. Cities need to move their workers from retirement plans that guarantee benefits to ones where benefits are based on contributions. The advantage to the city would be to eliminate the problem of unfunded liabilities, while the advantage to workers is that they’d own their plans outright — so they wouldn’t ever face the dismal prospect Detroit city retirees are now facing.
The obstacle is almost all political. The Empire Center’s E.J. McMahon puts it this way: “The norm for city and state unions has been to press for maximum pension promises — even if it meant accepting unfunded liabilities.”
This was entirely rational, by the way, given the assumption that taxpayers would ultimately have to make up any shortcomings. It also made sense for the unions because part of the old deal was union representation on the boards of these great big pension funds, which gave them enormous political clout.
As for the public workers, many accept this arrangement because the deal they get is unbeatable by anything in the private sector — where, as the Manhattan Institute’s Nicole Gelinas points out, “There is no way a cop or a firefighter could retire after 22 years and be confident of supporting not only himself but a surviving spouse for another 40 years.”
The hope is that younger public workers, watching what is happening in Detroit, come to realize another fact of the status quo: The defined-benefit systems for public workers really serves the lifers. Those who leave their jobs before retirement — between 40 and 50 percent of teacher do so within their first five years — lose out big-time.
Even in New York there are signs this might be dawning on some public workers. In an Empire Center poll of state teachers last year, 70 percent said they would have considered a defined-contribution plan if one had been offered when they were hired. The things they said they liked about these plans were: They’d be fully portable, they’d give the owners control and they’d be fully vested after a year.
City governments would be wise to look at ways to start tapping into this desire for more choices by offering workers incentives to opt out of the status quo. That likely means hybrid models of defined-contribution plans that use annuities to provide more security than, say, a standard 401(k).
That won’t persuade everyone. But it’s progress. And it’s not hard to imagine a young New York grammar- and elementary-school teacher opting for the TIAA-CREF defined-contribution system, which provides a good, secure retirement for state university teachers.
Leaders of public-employee unions will fight this every step of the way. These, of course, are the same people who assured their members it didn’t matter if the cities they worked for were going to hell — they would get theirs no matter what.
After Detroit, it may be a harder sell.
Gold Goliath is not your typical gold dealer.