Retirement: A Trail of Broken Contracts

Who Raided the Cookie Jar?

The City of Detroit is bankrupt. Michigan GOP governor, Rick Snyder, appointed an un-elected " Emergency Manager" to reorganize the city and return it to solvency. This administrator, Kevyn Orr, has proposed a reorganization plan that would unilaterally cut the pensions of many former  city employees by up to 34 per cent.

Norman, age 70, worked for the city for 31 years, retired five years ago at age 65. He worked for the Street Department and spent most winters clearing snow and ice in the middle of the night and repairing potholes during the day. In the summer he worked on repaving some streets and cleaning others. After retirement, he and his wife, Karen, who was a full time house wife and mother of five, have lived in a modest suburban home. Although he has some health issues, Norman and Karen do volunteer work at their local Catholic church and the St. Vincent DePaul society. Also, since he has been retired, they have traveled to Lakeland, Florida, for three weeks every March to attend their beloved Detroit Tigers spring training. Since they already had made plans, they will go again this March for the last time. Now that Norman will lose 32% of his retirement, travel is one of the luxuries they will have to forego. And, of course, they will not be attending their usual 12 home games at Comerica Park. Karen, meanwhile has begun searching the "Help Wanted" ads in the hope of finding a part time job to partially replace their lost retirement funds.

Norman is a fictional character; but there are thousands of Normans in the Greater Detroit area. Men or women, happy to have a job,  who worked diligently knowing that although they were not making as much as their friends working for the major auto companies, they were assured of "decent" retirement. Every payday they paid part of their paycheck into this system with which they thought they had a contract.

So, what went wrong? What happened to the contract? The politicians and accountants in the city of Detroit did not fund or under-funded the pension plan. They used that money to fund other aspects of government with the vague promise to replace it later. Of course, that never happened; and when the city began its downward spiral, there was no money to put back into the system.

For all practical purposes this appears to be a crime, but have you ever heard of a politician or an accounting firm found guilty of mismanaging a public employees' pension plan?

And Detroit is not a unique case. Pension funds across the US are unfunded or under-funded. 

Politicians and fund managers refer to the fund's obligations as "legacy costs" -- that sounds so much better than "under-funded or mismanaged funds."

The amazing aspect of this whole debacle of under-funded  pension plans is that it has happened previously in the corporate world. The employees regularly paid into the fund, but the corporations "deferred" their contributions. Then when things "went south" for the corporation, they declared bankruptcy and bye-bye "legacy" costs.

However, the real retirement disaster is the rape of Social Security; and since both Democrats and Republicans participated in the rape, nobody talks about it. It's the same old story. Social Security was adequately funded by the contributions, so much so that the system at various times had huge reserves, but politicians being politicians, decided that they would "borrow" that "extra" money to fund their pet wars/projects and then replace the money into the system at a later date. Unfortunately, no one bothered to do that, and now they are saying the system is running out of money and will have to be "downsized." (In fact, some Republicans who consider Social Security to be socialism, want to gradually eliminate it.) Once again, the  working contributors suffer for the mismanagement of politicians. And again, the contract is broken with no consequences for the culprits. 

And now everyone throws up their hands and capitulates. "O woe are we! Too bad; nothing can be done now. Sorry, retirees." 

But, there are things that can be done. For starters we can do what Al Gore proposed during the 2000 election. He wanted to take the entitlement trust funds like Social Security and put them is a "lock box." This would prevent Congress from taking the funds to use for other purposes and expecting future generations to pay it back. George W. Bush won that election (More accurately, the Republicans on the Supreme Court gave him the presidency.) and Bush along with a Republican Congress lowered taxes, raided the cookie jar, spent money like the proverbial drunken sailors, and got us involved in unfunded wars. Now, these same Republicans have the nerve to say the entitlement trust funds like Social Security and Medicare are going bankrupt and have to be down-sized.

If politicians, local governments, and fund managers get away with defaulting on commitments to retired workers, it will be one more nail into the coffin of the middle class.