|Pay Retirees What They’ve Earned|
Cutting pension benefits amounts to taking away pay from workers after they already put in their work. If governments feel the need to take property, they should look for wealthy victims. But, of course, the Wall Street folks who bear much of the blame for the problem seem likely to get away unscathed.
Much of the underfunding dates to the 1990s stock bubble, when many pension managers made minimal contributions because the stock market run-up was financing their funds for them. The bond-rating agencies green-lighted this practice, effectively assuming the bubble would grow ever larger. (Some of us knew better.) Wall Street types engorged themselves on fees from these funds, taking money that could be used to pay retirees.
Once governments got in the habit of not making contributions, they found it hard to break when the bubble burst. Illinois and Chicago went a decade without making required contributions. The collapse of the housing bubble devastated state and local revenue, while increasing expenses, making the obligations harder to meet.
Still, in most cases, the unfunded liabilities are not nearly as large as has often been claimed and can still be met. For example, I've calculated that Chicago’s unfunded liabilities are around 0.6 percent of the value of future income over the next 30 years.The figure is comparable for the state of Illinois. These sums are hardly trivial, but presenting them in this light is not as scary as simply reporting that tens of billions of dollars are owed, as those pushing cuts are prone to do.
Taking care of these obligations could mean some increase in taxes, which is inconvenient, but this is money owed. As with the federal debt ceiling, another source of scare mongering, the place to deal with the problem is when the commitments are being made, not when it is time to pay up.
In the case of Detroit, there will be no choice but to have the state intervene as it already has in appointing a city manager. The city is a creation of the state. Under its constitution, which requires pensions be paid, it is difficult to see how the Michigan can avoid taking responsibility and paying the pension obligations.
The crucial point is that employees worked for these pensions. They are not a gift from the government; they were part of their pay package. Governments are not looking to seize properties that may have been sold at too low a price or to reclaim tax breaks and incentives to sports teams and other businesses that may have been too generous. Why do so many people on the political arena think it’s a good idea to take back the money that workers have already earned?
That says a great deal about politics in America today.