Pension crisis ruling: broken promises vs. the bottom lineBlog added by Paul Wilson on December 9, 2013
Joined: May 30, 2007
Recently, a federal judge ruled that the city of Detroit could legally cut pensions promised to workers as part of the city's bankruptcy plan, a decision that could have long-lasting ramifications, according to a recent piece on The New Yorker's website.
In her blog "The Real Reason For Pensions," business editor Vauhini Vara writes that although much of the controversy surrounding the pension crisis has focused on the ethical side of the argument, there are other factors to consider, as well.
For one thing, the ruling sets a precedent that will allow other cities to support their own decisions to cut pensions for current state employees. "In October, employment in local government was basically unchanged from a year ago, even as private-sector jobs continued to rise. As cities shed workers rather than hiring new ones, they have more incentive to cut compensation than to raise it, at least in the short run," writes Vara.
As the blog points out, those in charge of balancing budgets are, by definition, focused on the bottom line and will do what they can to eliminate debt wherever possible. And clearly, pension budgets are low-hanging fruit for those looking strictly at the ledger – especially in the many cities and states currently facing bankruptcy.
But Vara notes that public pensions have for years helped governments lure employees despite exclusions from federal benefits and lower wages. "If pensions start becoming less generous in the long term, it will be time to ask another tough question: should cities make up for lower pensions by paying their employees more in wages?"
She cites a recent study which found that reducing teacher compensation "will almost certainly result in a lower quality of applicants for one of the nation's most important jobs." And I'm fairly certain these findings aren't unique to teachers.
And I have to wonder, too, about the effect this ruling will have on people's already tenuous trust for the government. Budget shortfalls or not, we're still talking about a broken promise made to people who upheld their end of the deal, who worked hard for years to provide security for themselves and their families.
Yes, the money has to come from somewhere; and yes, it's a problem that's not going away. But tell that to the federal and state employees who faithfully clocked in every day for decades. My dad worked for the Colorado State Patrol for more than 30 years, and his pension is the cornerstone of my parents' retirement plans. If it were eliminated or reduced, it would pull the rug out from under them on the brink of retirement. I can only imagine his reaction after years of walking up to suspicious cars on deserted roads, working graveyard shifts, and heading off to work while we opened presents on Christmas morning. I'm not trying to be melodramatic here but it all happened – a lot.
Even if these decisions never affect the pensions of long-time veterans, what of those who are making similar sacrifices now?
There are certainly many other factors outside of the ethical repercussions that are worrisome about this ruling, but the ethics alone are enough to give me pause. I can only hope that others agree and look elsewhere for solutions.
Employees lose when pensions are frozen, even if DC plan ups contributions
Is the public pension crisis overstated?
City pension costs lower than expected
Cost of pension buyout falling
Most states' pension plans inadequately funded
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