Bankruptcy and Pensions

The city of Detroit is broke and other cities are sure to follow the Motor City into the financial abyss of bankruptcy.  Financially strapped cities and states are becoming commonplace as politicians fail to follow the golden rule of budgeting – Do not spend more than you bring in.  Some cities on the list of financial trouble include: San Francisco, Cincinnati, Harrisburg, Camden, Chicago, and Washington, D.C.

Policy analysts have been quick to point the finger at one or two causes of Detroit’s financial woes but in truth, as with most things, there are many places to point the finger.

USA Today ran a piece on Detroit’s financial problems.  The article examined several causes often thrown into the discussion for Detroit’s demise.  They conclude that the auto industry and the city of Detroit are not interchangeable.  They argue that years of tension have existed between the two entities and only a few manufacturing plants remain inside the city limits.

Thomas J. Sugrue has done some interesting writing on the transformation of the automobile industry.

Sugrue refers to it as going from a Motor City to a Motor Metropolis.  He provides interesting historical insights into the migration and decentralization of the automotive manufacturers.  Sugrue covers everything from the size and quality of Detroit’s streets, which were unable handle the abundance of traffic that accompanied massive downtown automotive plants, to the migration from smoke-filled downtown which was made easier by the increase in automobile use.  The causal arrows are sometimes difficult to understand.  I get the feeling from Sugrue that he sees the companies moving away from the city as depriving the city’s tax revenue.  There may be some truth in this.  However, the arrow may point in the other direction.  Cities and states cannot expect companies to remain in locations where tax rates and regulations are high.   New York City and L.A. are good examples of this.


Another reason provided is that the city’s pensions are driving Detroit into ruins.  Pensions are a unique animal.  Are they a debt the city owes its former employees?  Or, are they moral obligations?


They are not the same as entitlements.  People are actually exchanging a good or service (work) for the benefit of a pension.  I believe pensions are more like contractual promises.  The government tells the worker that if he or she works for a period of years, they will receive financial compensation in retirement.  To be sure, different cities and states offer different pension plans.  Some pension plans are lavish, while others provide a more humble retirement.

When Detroit announced it was filing for bankruptcy, thousands of city employees grew fearful that the city would terminate pension benefits, thus leaving retirees broke and without hope.

The above-cited USA Today article demonstrates that Detroit’s annual payout is not necessarily the problem.  Police and fire retirees receive an annual payout of roughly $34,000, while those receiving pensions from the city’s general fun receive less than $20,000.  This is rather meager when compared to Kansas City, Chicago, and Dallas.  The main problem facing the Detroit pension system is there are not enough workers paying into the system.  In Detroit there are 3,200 workers paying into a system that supports 9,300 retirees.  It makes sense when a city is financially strapped there is no money to hire new employees to pay into the system.

Greater life span is also a problem for many pensions, especially when the benefits are offered for life.  Perhaps it did not make a difference 30 years ago when the lifespan was not what it is today.  But imagine a scenario of someone retiring at age 50 and living until age 80.  That would be 30 years of pension benefits.  In some cases, pension benefits are collected by the retiree’s spouse.

The Bottom Line

The moral obligation behind a pension is one that cannot be taken lightly.  Workers have sacrificed years of public service in exchange for the promise of a pension.  In a vast majority of the cases, workers have made life-decisions based upon the agreement accompanying the pension.

Some have expressed concern over the fact that if Detroit can get away without paying pension benefits to retirees, other cities will see this as a viable option.  If pension obligations are not met, it could have a serious economic impact.  At some point the judiciary will likely be involved in settling this dispute.

Having said that, I believe that the pension system is antiquated.  It needs to be reexamined in a serious way.  I believe that pensions should actually be more like stipends.  Some states have pension systems that are rather generous.  For current employees, governments need to ensure that employees are not padding their pensions via overtime or inappropriate measures.  Governments need to seriously address the pension obligation with new employees.  Those who are in the system will not suffer.  However, those coming into the system will receive a greatly reduced benefit.  If the prospective employee is aware of the pension/stipend system upon hire there are no additional expectations.

One thing is clear.  With more cities massively over budget, this is a debate that is just beginning.

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