Detroit's bankruptcy shows even pensions aren't safe

America's rugged individualists have argued for many years that governments can't be trusted. Turns out they were right. More so than they probably ever realized.

Municipalities, utilities and states across the U.S., faced with debts and liabilities piled up by irresponsible elected officials over the years, now want to renege.

Cities are seeking, and obtaining, permission to walk away from their commitments. State governments are simply giving themselves that permission.

And U.S. conservatives, who preach financial accountability (Bush-era Republicans saw to it, for example, that credit card debt collectors can follow ordinary Americans all the way to the grave), are not just cheering those faithless governments, but demanding that they go even further.

The shrunken city of Detroit is the latest and biggest example.

It just secured a judge's permission to declare bankruptcy, and will now begin imposing "haircuts" on its creditors, who it appears will end up shaven nearly bald.

The most vulnerable of them are Detroit's 23,000 retired municipal pensioners.

People like Gwendolyn Beasley, a 67-year-old who worked as a Detroit library clerk for 34 years and now collects $13,085 a year.

"I am very angry," she tells reporters, futilely.

Michigan's constitution, she points out, explicitly protects government pensions.

Tough luck, ruled the judge. Beasely's pension is now in the barber's chair.

Nothing's safe

In America's Hunger Games economy, nothing is protected anymore.

(Except, of course, the banks and big corporations like Chrysler and General Motors that had to be rescued with tax dollars when everything crashed five years ago.)  

In the state of Illinois, the legislature just passed a legislative "fix" for the $100-billion hole in its workers' pension plan, which actually won't come anywhere near to fixing it.

At least, though, Illinois is trying to respect the pension deals it already signed, and is focusing the financial pain on younger workers, who still have the option of finding work elsewhere and retaking control of their futures.

Illinois has also raised taxes to pay for its pensions, provoking the fury of conservatives.

The Wall Street Journal's editorial page, scourge of taxation everywhere, blames the whole mess on greedy unions and cowardly politicians.

And in one respect, at least, the Journal is right: Of course unions are greedy, just as businessmen are greedy. Greed, otherwise known as acting in your own economic interest, is what makes the U.S. economy work.

The real villains are the politicians who agreed to labour deals they likely knew were unsustainable.

A 'fraud' on the public

"These jurisdictions didn't face up to how much money they would need to put in to meet the commitments they made," says Chester Spatt, a professor at Carnegie Mellon University and the former chief economist for the Securities Exchange Commission.

"Frankly, in other contexts, one calls that fraud."

Politicians, who usually want to be re-elected, have a long record of incurring big debts, then walking away and leaving the mess to successors, who, if they can, then pull the same stunt.

And their pension plan advisers, anxious to please, play along.

Even now, pension funds across the U.S. are assuming "ridiculous" returns of seven and eight per cent to try to show how solvent they are, says Spatt: "It's stunningly irresponsible."

But as the bills arrive, politicians, especially Republicans, are choosing to demonize the victims, and it is easy to see why.

Campaigning against the rapacious clerks, teachers, librarians, police and firefighters who had the nerve to accept these pension deals has become a surefire political win.

Many voters don't have pensions at all. Why, they ask, should government workers?

Indeed, some public servants do enjoy pensions and benefits that look shockingly generous and would be difficult to sustain without imposing higher taxes, which is definitely not a vote-getter.

The point, though, is that these workers signed deals to which governments agreed, in many cases accepting lower salaries than they would have earned in the private sector.

And they held up their end. Whatever you might think of the value of their services, they supplied them, as contracted.

More questionable debt

A deal is supposed to be a deal. But in post-crash, jobless-recovery America, what is supposed to be is not what is.

Spatt calculates the total unfunded liability of government pensions in the U.S. is probably in the trillions of dollars.

But the problem goes further than that. In fact, the vast majority of Americans, whether they realize it or not, will be looking to collect from government someday, and chances are the money won't be there.

The Social Security system, America's biggest pension plan, is basically broke. Successive governments have raided the Social Security fund, and shied away from increasing premiums. By some calculations, it owes $20 trillion more over the long term than it can pay.

Detroit's bondholders – a lot of them senior citizens who purchased municipal bonds as a form of substitute pension – have now learned that not all government debt is safe.

They, along with the city's pensioners, have reportedly been offered pennies on what they are owed.

Federal and state debt is less risky, but only because those levels of government can borrow more easily and Washington can print money. (Which, of course, has lowered interest rates and further put the screws to retirees who are getting miserable returns on their savings.)

In Detroit's case, there is no talk of Washington stepping in, and Spatt, for one, says that is a good thing.

Not only would federal involvement set off an endless chain of government-to-government bailouts (the city of Chicago's pension hole is $20 billion), Spatt says it would ultimately do nothing to stop irresponsible politicians from creating the same situation again.

Ultimately, says Spatt, workers must understand that pensions are risky benefits, and investors must understand that "the full faith and credit of government doesn't mean what it used to mean."

I would never, of course, suggest any of this would apply in Canada.

Canada, as we are all constantly told, is far more prudent and better managed, and Canadians trust their governments more.

Still, it might not hurt to take note.