Detroit Pensions: Unsafe at Any Speed?

Were Detroit's pension managers incredibly stupid or criminally irresponsible?

Just when you think that Detroit's pension woes cannot get any more outrageous, another story comes along to make you question your faith in common sense and the laws of arithmetic.

I've written before about Detroit's mad practice of issuing "13th checks" to retirees every time investment returns exceeded protections. I was speechless when I first heard of the practice, which reflects the kind of fundamental math error that the pension trustees should have moved beyond by eighth grade.

They should have understood that the target investment return was just an average: Some years they'd make more, and some years they'd make less, but over time, it would average out to around 8 percent. Instead, they seem to have thought of anything above 8 percent as bonus money that they could distribute to retirees. This approach is fine if you also top up the fund in the down years, but of course they didn't do any such thing. I am sort of astonished that their advisers told them this was OK, but then, the trustees presumably had the power to keep shopping advisers until they found one who had also flunked middle school math.

Now it turns out that the craziness did not stop with the 13th check; they also provided 401(a) accounts, a sort of savings account whose returns were retouched in much the same way as the pensions were:

Edna Love's 58 years as a nurse for Detroit's health department earned her a $2,000-a-month pension when she retired in 2011. That pales next to the $1 million she got from a separate city-sponsored savings plan where she put 5 percent of her pay year after year.

The annuity savings program within the Detroit General Retirement System created a class of privileged retirees in a city where pensions average about $19,000 a year, according to municipal records. The accounts got $756.2 million from the pension fund during 1985 through 2007 as extra interest, atop a guaranteed 7.9 percent backed by public money.

These retirees may now have some of their payments clawed back by the bankruptcy trustee, who can recover transferred funds deemed to belong to the city's creditors. As the research director for the National Association of State Retirement administrators told Bloomberg: "I've never heard of that happening. I'm not aware of a guaranteed return on a defined-contribution plan."

I go back and forth between thinking that Detroit's pension trustees were shockingly innumerate and thinking that they deliberately handed out money on the theory that if everything went south, the state or federal government would have to bail out the pension plans. Whether that matters morally, or perhaps legally, the policy answer is probably the same: Neither the state nor the feds can afford to bail out this kind of gross mismanagement. To do so is to send the message that you can hand out political benefits for your favored constituents right now and have someone else in another place pay the bill years later.

Even if you don't care about the open invitation to malfeasance, many of your fellow taxpayers will -- and although Uncle Sam can probably afford the tab for Detroit's pension errors, the federal government cannot afford to pay the tab for everyone's ill-considered retirement promises.

Of course, that still leaves us with the problem of the retirees, particularly those people who didn't contribute to Social Security during their working years (some state and local workers are exempt). Ultimately, the taxpayers are likely to provide some sort of a basic living for those who have nothing in reserve. But it won't be the free-handed largesse that they have been expecting. Too bad the bankruptcy judge can't make pension board members go house to house to explain why they gutted the fund's future to hand out extra checks.

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