The only surprising thing about the city of Detroit declaring bankruptcy is that it took so darn long to happen. An icon of urban decay for the last four decades, Detroit shed businesses and population both to suburbs and other metro areas at a rate that undercut their ability to serve even the most basic of functions. Even as the city fails to respond to police calls in under an hour, or stop the infamous tide of arson, or even have a single major chain grocery store willing to serve the 713K poor souls who still call the city home, former city employees are demanding that the promises made during better times be honored. Unfortunately for them, they aren’t in any better position than other creditors.
We all know J. Wellington Wimpy’s famous line “I’d gladly pay you Tuesday for a hamburger today.” Pensions are just that. Employees go to the employer to ask for a raise. The employer, eager to avoid any liabilities now, makes a proposal: how about we pay you later? Much, much later. It’s a gamble for the employee that the employer will be in a better position decades down the road to pay that money than they are now. For government employees, it seems much less risky since their employers is backed by the taxpayers. This isn’t to say that steps aren’t taken to mitigate said risks. Pensions have investment funds used to fulfill those future liabilities. They are supposed to seek a specified rate of return to accomplish this.
But it’s still a risk. Accepting a pension is a gamble that your employer will be able to fulfill those promises later at much more generous terms than they can do today. A reasonable person would accept that working for 20-30 years to get a guaranteed salary for life is too good to be true and will not last. But as with anyone taken in with a too good to be true proposition, many have become irrational and demand satisfaction. Just like any other creditor, they made their gamble. Now they have to live with the results.