Detroit’s workers are not the first to see their retirement finances suddenly reduced – they are only the most recent
If a city declares bankruptcy and its current and retired workforce ranging from librarians and sanitation men to police officer and fire fighters are forced to take permanent reductions to their promised monthly pension benefits, will anyone care besides the impacted employees and the unlucky retired workers dependent on that income?
Thanks to last week’s bankruptcy filing by the city of Detroit, we’re about to find out the answer to that question is almost certainly “no” – and you can put the blame on the 401(k) and all the other implements of the multi-decade unraveling of the American social contract.
The latest from Detroit: Kevyn Orr, the city’s emergency manager, has said workers can expect “cuts” to promised benefits, which currently average, according to the New York Times, the not exactly princely sum of $19,000 per former employee.
Detroit workers are screaming about betrayal and they are right. Municipal employees take their jobs, in part, because of promised retirement benefits.
Yet all too many voters are less than sympathetic. After all, $19,000 is more than most can expect to earn from their own retirement savings. According to The National Institute on Retirement Security, the median amount saved for retirement by a household less than ten years away from leaving the workforce is $12,000.
And no one can expect taxpayers to indefinitely support a two-tiered retirement system, where they foot the bill for people to live better than they themselves will.
That’s where the destruction of the American corporate pension system has left us.
A brief bit of history is in order here. The 401(k) – the main instrument of the do-it-yourself retirement era – originated in the late 1970s, as a way offering high-level corporate executives a way to put aside a portion of their salary on a tax-deferred basis. It was, frankly, something of a tax dodge. No one ever intended it to be a primary retirement funding mechanism, nor was it meant to apply to workers at any income level.
However, the Reagan administration expanded the 401(k) allowing companies to offer the benefit to all employees. That’s when the corporate bean counters stepped in. Realizing the 401(k) was cheaper on the company bottom line than traditional defined benefit plans, they began to freeze traditional pensions, and force workers to take full responsibility for their own retirement planning.
The result can be seen in the numbers. In the early 1980s, almost two-thirds of workers were employed by companies that offered a pension plan. Today, the number is less than 20% – with the majority either employed by the public sector or represented by a union. Almost four out of five government workers are likely eligible for a pension, according to research published earlier this year by the Economic Policy Institute. Union members in the private sector account for almost all the rest. If you belong to neither group – and most of us do not – only 13% of non-unionized employees had access to a pension in 2012.
This environment began to allow for all sorts of dodgy behavior. Numerous corporations including everyone and everything from United Airlines to Hostess Brands – the former owner of the fabled Twinkies – have ditched their pension obligations in bankruptcy court, leaving workers who had planned for decades on receiving certain amounts of money monthly in retirement to instead get fractions of those payments from the Pension Benefit Guaranty Corporation, the federal agency responsible for insuring the health of the nation’s defined benefit plans.
In other words, Detroit’s workers are not the first to see their retirement finances suddenly turn out to be less comfortable than they were led to expect – they are only the most recent.
At the same time, a number of public pension plans – Detroit’s included – were systemically underfunded by legislators and governors and other elected officials eager to pass the financing buck on to the future. Many public pension managers based future projected rates of return on investments that would later come to be seen as unrealistic. This happened for any number of reasons that could be dissected in many, many future columns, but for the time being the most salient point is this: the United States’ public pension system is $1 trillion in the financial hole.
All of these facts combined to undermine support for traditional pensions. As they covered fewer of us, fewer of us felt impelled to speak up in their defense. That was unfortunate. Pensions are not only more cost effective than the 401(k), they work better for the majority of people. With a pension, we don’t have the responsibility of guessing the right amount of money to save and how to invest it so it will grow to the right amount. Pensions also absorb the risk of us outliving our savings, something that is becoming an increasing problem for many of the elderly.
Cliches like “united we stand, divided we fall” become cliches for a reason. Social Security and Medicare don’t enjoy the broad public support they do by accident. All of us, from the poorest to the wealthiest members of society are eligible for Social Security and Medicare. As a result whenever someone, no matter where on the political spectrum they stand, steps forward with a “reform” plan for either entitlement, Americans seemingly rise up en masse to stop any proposed changes.
But when it comes to benefits we don’t all share, it’s another matter. After more than thirty years of the 401(k) era, we no longer view pensions as something we must obtain for ourselves. We repeatedly tell pollsters we wish we had them but when it comes down to it, we don’t protest when yet another group sees theirs cut or jettisoned entirely. It’s a race to the bottom – and we’re all losers.