For years, economic experts have warned about the risks and potential financial calamities associated with underfunded pensions. Sadly, this future has arrived. Detroit recently earned the dubious distinction of being the largest municipality in the United States ever to declare bankruptcy, with retirement-related debt constituting over 80 percent of the city’s unsecured debt. Perhaps no group will feel the pain of this bankruptcy more than Detroit’s public employees, and especially its almost 20,000 retirees.
In all likelihood, the bankruptcy court will slash Detroit’s pension payments to retirees as part of a package solution to restore the city’s financial sustainability. This will not be the first time that retirees are forced to pay the price for a dysfunctional system. In late 2012, retirees in Central Falls, Rhode Island, saw their pensions cut by up to 55 percent as part of the city’s bankruptcy process. Similar proceedings are ongoing in Stockton and San Bernardino, California, and in each of these jurisdictions the future of retirees’ promised benefits is at risk.
These scenarios are becoming increasingly common. Municipalities, and indeed states, all over the country are on the same path as Detroit, and unless they act now, the results of their escalating financial duress will be no different. In Chicago, for example, the city’s six pension funds are less than 50 percent funded, with a nearly $30 billion gap between assets and liabilities. By 2017, up to 25 percent of Chicago’s annual budget could be spent on pensions. Many of the nation’s largest cities face similar circumstances. Economists estimate that paying down the current pension debt in the United States over the coming 30 years will require government contributions to more than double, reaching 14.1 percent of state and local government own-revenue.
Given these staggering obligations, localities that do not address their pension systems now will end up driving straight over the cliff of bankruptcy. The sad irony is that those who will be most hurt by the bankruptcy process are the same public employees whom politicians claim to be protecting when they avoid serious pension reform. Local elected officials have knowingly and irresponsibly made unsustainable promises of large future benefits, often in order to avoid wage increases that would impact short-term budgets. They have done so with full knowledge that not they, but future elected officials and taxpayers, would be held accountable for delivering on these promises. Meanwhile, unions shortsightedly exert enormous pressure on politicians to make these deals – threatening to strike and to bring critical public services to a halt, mobilizing their members to provide money and manpower only to candidates who support the current system, and viciously opposing candidates who support fiscally responsible solutions.
This dysfunctional decision making process inevitably leaves public employees to suffer the consequences. In time, underfunded pension plans will either be exhausted or be dependent on municipalities without the financial wherewithal to keep funding them. And by then, the politicians who promised the undeliverable, and the union leaders who encouraged those promises, will be long gone.
Our public employees deserve more than false promises. They deserve to be part of a system that is fiscally sound, responsibly managed, and that ensures that their retirement benefits will be paid when due. For the past three years, we, both personally and through the Laura and John Arnold Foundation, have encouraged jurisdictions to face the true magnitude of their pension problems and to develop structural reforms that are comprehensive, sustainable and fair. For some systems, relatively minor changes are sufficient to address the problem. Others require more comprehensive reform. What is invariably true is that addressing the issue today will prevent a crisis tomorrow. In Rhode Island and Kentucky, and in the cities of San Jose and San Diego, citizens and their leaders have boldly and responsibly addressed their pension problems before they reached catastrophic proportions. And in so doing, they created a healthier pension system that will both keep promises to retirees and allow public services to be adequately funded.
Some have criticized our pension reform work as anti-union or anti-employee. We could not disagree more. Ignoring the problem will not make it disappear; it will only exacerbate an already critical situation. Pension reform is far from painless, but we have all seen the consequences of inaction.