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Dan Calabrese: State must resist moral hazard in making Detroit pensioners whole

If city of Detroit retirees end up getting stiffed on all or part of their pensions as a result of Detroit’s bankruptcy, that will be a shame. But it is no more a shame than the same fate suffered by everyone else who is owed money by the city and is going to end up taking a haircut on the deal.

Some argue that the Legislature and Gov. Rick Snyder should make pensioners whole by swooping in and allocating state money to restore an average of $1,600 a month for city retirees, and $2,800 a month for police and fire retirees.

But the state did not make the unsustainable pension guarantees that have now become vulnerable in bankruptcy. And it is inconceivable, if other cities were to follow Detroit’s example and likewise declare Chapter 9, that the state could handle the costs associated with making everyone “whole” who was once sold on a promise that couldn’t be kept.

And that brings us to the problem of precedent in advocating what amounts to little more than a pension bailout from Lansing.

 

Detroit's retirees just learned that their pensions could be cut in the city's bankruptcy.

Detroit’s retirees just learned that their pensions could be cut in the city’s bankruptcy.

Just like General Motors and Chrysler, Detroit found it easy at a time when cash was tight to sweeten the pot for employees — or so it was thought — by lavishing generous retirement benefits on them, you could always find a pension fund manager who would present a future scenario that made it look like the pensions would be funded. This allowed politicians to claim they had done something wonderful for workers while letting their successors worry about actually making the payments.

And just like General Motors and Chrysler, the bailout mentality seeped in when it became apparent that the promises of the past had become unsustainable in the present. The common thread is the notion that employees who demand such retirement benefits as a condition of labor peace should never have to deal with the consequences that stem from the fact their demands were not grounded in reality.

If the state bails out Detroit’s pension funds, it will send the message to every other city to go ahead and keep making unsustainable future commitments, because they are sacrosanct, and one way or another taxpayers will fulfill the obligation.

I don’t like the thought of elderly people facing the sudden loss of part of their fixed incomes. It is going to put a strain on them and on their families. But a city just went broke due in part to the belief that the elderly are entitled to a guaranteed income forever, regardless of whether the source of the money is able to pay. America is headed for bankruptcy for the same reason.

Retirees can’t be sacrosanct when there’s no one left with any money to keep the promises that were made to them. It’s time to find a way to help retirees sustain themselves without public institutions running themselves into bankruptcy in the process, and that starts with rejecting the idea that they are any more immune to financial reality than anyone else.

Dan Calabrese
Dan Calabrese is editor-in-chief of HermanCain.com, the multimedia site owned by former presidential candidate Herman Cain. In addition, he is an accomplished business and trade journalist - and is the author of The Royal Oak Series of Spiritual Thrillers, a three-part series of novels set in Royal Oak, and available for purchase at www.dancalabresebooks.com. Dan lives in Grand Rapids.