We Are All Going to Pension Hell

Today's pension crisis shows there's a limit to how tightly past taxpayers can bind the citizens of the future.

One of the most startling moments of the Detroit bankruptcy was when a judge stepped in to stay the bankruptcy at the behest of the city's public sector unions...and then said that she was going to tell the president about this.

"It's cheating, sir, and it's cheating good people who work," the judge told assistant Attorney General Brian Devlin. "It's also not honoring the (United States) president, who took (Detroit's auto companies) out of bankruptcy."

Aquilina said she would make sure President Obama got a copy of her order.

"I know he's watching this," she said, predicting the president ultimately will have to take action to make sure existing pension commitments are honored.

Aside from turning President Obama into a quasi-mystical entity who is apparently sacred party to all transactions involving any government, anywhere, this was a veiled confession that she did not have the power to order what she was ordering. She could issue a piece of paper telling Detroit to protect its pensions, but that piece of paper would not give the city any more resources to pay them. It was a quixotic attempt to stop the unstoppable, to fix the unfixable. The only way her order made sense was if some outside force stepped in to provide the cash.

The invocation of St. Obama is probably not going to do Detroit much good. The federal government is not going to bail out Detroit. Nor should it; bailing out cities that got themselves into financial trouble is an invitation to much more financial trouble. In Illinois, state and local officials are squabbling over who is going to pay for the disastrously underfunded retirement benefits of state and local employees:

State lead ers have argued over the meaning of a state constitutional provision protecting government pensions in Illinois, and, in private conversations, over the potential political fallout from unions if benefits are cut. But Mr. Emanuel has openly called for increasing retirement ages, raising workers' contributions toward their own pensions and temporarily freezing inflation adjustments now paid to retirees, all of which amount, union leaders say, to benefit cuts.

Public sector union leaders have been enraged by Mr. Emanuel, who was at the helm in 2012 during this city's first teachers' strike in 25 years and who has announced plans to phase out city health care coverage by 2017 for some city retirees. A change in pension benefits could affect more than 70,000 people who worked as Chicago police officers, teachers, firefighters and others, and who now receive average annual benefits ranging from about $34,000 for a general-services retiree to $78,000 for a former teacher with 30 years of service.

Some labor leaders say the city, not the state, is ultimately responsible, arguing that Chicago leaders long ago should have begun planning how to pay for pensions promised to its workers, regardless of insufficient state contribution formulas.

"The city failed to fund this all along, and now Mayor Emanuel has made it clear he is going after the hard-working men and women on the Chicago Police Department to make up for that," said Michael K. Shields, president of the Fraternal Order of Police, who described Mr. Emanuel, simply, as anti-labor. "He's trying to stiff us out of our pay."

Chicago's teacher pension fund is, says the New York Times, "dangerously close to collapse"; another may run out of money within the next decade.

The rage of public sector unions is understandable. And this debate is going to be bitter, because unlike with regular firms, there's no clear point at which you can say, "Yes, that's it, we all agree they're insolvent." While a private firm cannot (thank God) simply take more money from their customers, in theory, governments can generally raise taxes and cut other spending to pay pensions. And in theory, they should, most of the time, because the taxpayers promised those pensions through their elected representatives.

Yes, I know that this was often bad politics, not sound public stewardship. But we have to treat decisions made by elected officials as, well, decisions made by the citizens of those locales. If the citizenry can demand to renege at any time because they don't like the outcome, government can't function at all -- not even the bits we like, like police and roads.

We can't seize and sell off the city of Chicago to make those obligations good. And so we will argue ... in court and out of it, because the fact is, many state and local governments will be unable to pay for all the promises made by the politicians of yesteryear:

If you define municipal debt simply as what states and localities have borrowed, the total nationwide comes to about $3 trillion. Nevertheless, these governments actually owe more than twice that much, according to estimates from groups like the States Project. The reason for the discrepancy is that states and localities carry another kind of debt -- promises of retirement benefits to public-sector workers -- and they have radically underfunded the systems that must pay for it. As Boston University Law School professor Jack Michael Beermann wrote recently in the Washington and Lee Law Review, the situation is a "double whammy" for future taxpayers, who not only will have to pay for "the consumption of prior generations" but also will receive "reduced government services" as increased spending on retirement debt crowds out other programs.

There is, in the end, a limit to how tightly past taxpayers, or their representatives, can bind the citizens of the future. It is a genuine tragedy that people who worked hard for the city of Detroit for 30 years should lose pension benefits. But that doesn't mean that the city of Detroit should turn off the streetlights and get rid of schools and ambulance service in order to fund those lost pensions. And it's hard to argue that the taxpayers of other places are morally obligated to step in.

But how much should cities have to cut, once the tax base is exhausted? Senior centers? Parades? Maintenance at city parks? We'd better start asking those questions, because pretty soon, we're going to need to answer them.

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