The Motown label’s first hit was Barret Strong’s “Money (That’s What I Want)” and it went to number 23 in the US charts in 1960. 53 years later and the song will be echoing through the Detroit suburbs as a landmark ruling by Justice Rhodes in the Detroit municipal bankruptcy case means that pension payments to retired city employees could be reduced.
The bankruptcy of Detroit is the biggest bankruptcy in the history of the United States and Rhodes’ ruling will be studied across the world with interest by city administrations, and with fear by pensioners, as it sets out for the first time that pension benefits are contracts like any other and can be impaired during bankruptcy proceedings. Detroit has sought bankruptcy, as its debt situation is so severe that the state appointed emergency manager, Kevyn Orr, believes that it is the only path back to financial stability.
Other cities and even governments will be tempted by this approach as mounting public debt make the liabilities to pensioners, taken on during the good times, much harder to meet. The pensions of former government employees have always been seen as sacrosanct but the level of Detroit’s debts has led to the judge’s ruling that pensioners cannot be exempt from taking some of the hit for the financial mismanagement of the city.
While this is probably a matter of relief for the hard-pressed taxpayers of Detroit, it’s the precedent that will cause global shockwaves in the pension world. Up to now, the debate about public pensions has been completely focused on the dangers to fiscal solvency in many countries caused by the ageing population and the fewer numbers of workers that will be paying taxes in order to support payments of state pensions to retirees by the mid-21st century. Most of the solutions have been focused on lifting retirement ages in order to reduce future liabilities.
This argument has taken place while everybody studiously ignored the elephant in the room – which was the public sector defined benefit pension bill that is being carried by every government in the western world: federal, national, state and municipal. While giant profit-making multi-nationals are closing down their defined benefit pension schemes through fear of the liabilities it puts on the balance sheet, governments blithely go on racking up liabilities for future taxpayers without breaking into a sweat, presumably on the basis that they’ll never have to face those taxpayers when the check finally comes in.
Detroit is one of the first to have to face that reality and suddenly it appears that pensioners are vulnerable. While it’s not certain that pensions will actually be cut the possibility is out there. Other administrations will be following this closely as the chickens of previous administration / union deals come home to roost. This might be the spur that finally goads administrations worldwide to take on the public sector unions and come to a more sensible arrangement for public sector pensions.
“Ain’t no mountain high enough” sang Marvin Gaye but for the pensioners of Motown, the mountain of debt currently held by the city administration looks like it will making surviving in retirement an uphill task.
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