ESSAY: Home of the Brave, the Free, and the Invisible: how Detroit, pensions and new graduates are connected

Essay: Home of the Brave, the Free, and the Invisible: How Detroit, Pensions and New Graduates are Connected

 -Christopher Carroll

Last week, Detroit filed for bankruptcy. This was by no means a sudden disaster. The city has been going bankrupt for decades.  It wasn’t until now that the nation woke up to it. Americans working in the public sector are now acknowledging that their pensions are not guaranteed. Like a heart attack brought on by years of poor diet and exercise, Detroit has suddenly shown us that years of poor policy and neglect have taken their toll on us all.

Detroit has been mismanaged for years and the decline in the automotive industry has crippled the city beyond repair. However, the entry of foreign automobile companies with operations outside Detroit was not the only major problem. The city’s inability to effectively manage public pension funds was crippling.

 

The state estimates that Detroit’s defined-benefit pension and health care plans, which are based upon the service time of a public employee and that employee’s final salary, are about 73% funded. However, as was noted on July 27th by the Economist, that may be a very optimistic number, with the real number possibly being as low as 48%. While making promises to state employees, state and city governments were simultaneously failing to devote enough money to cover the commitments.

This problem is not unique to Detroit, or even Michigan. The difference between Illinois’ funded and unfunded pension commitments is equal to 241% of the state’s tax revenue, by far the worst in the country. The shortfall in Connecticut is the second worst, representing nearly 190% of tax revenue and Kentucky, New Jersey, Hawaii, Louisiana, Colorado, Pennsylvania, Massachusetts and Maryland all have pension gaps at, or exceeding, 100% of tax revenue.

Courtesy of the Economist: http://www.economist.com/news/united-states/21582282-pensioners-are-pushing-many-cities-and-states-towards-financial-crisis-who-pays-bill

Detroit’s problems could be coming to a city near you. Some estimates place the total pension deficit in the United States at 17% of GDP. Terrifyingly, that does not even include the deficits in programs for healthcare provided by local and city governments (deficits which shockingly manage to eclipse those of the public pension system). Clearly, the issue is of national importance. The future of both our young and old generations are at risk.

Edward Siedle, former SEC attorney and financial watchdog, explains that “75% of Americans nearing retirement in 2010 had less than $30,000 in their retirement accounts.” This is bad news, as current lifestyles in America are shockingly different to those of 40, 50 and 60 years ago. Americans are living longer than ever before. Medical advances and dietary and exercise awareness have meant that the average life expectancy in America is just over 78 and a half years, putting economic stress on an old fashioned pension system.

To make up for longer life expectancies and modern lifestyles, our pension system must be reformed. Doing so is imperative for our economy and for the 20 year olds just now entering the jobs market, struggling to stay above water on student debt, treading water while they miss their economic primes.

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Politicians and the public must seriously engage questions regarding the way pensions are funded and executed. We must seriously discuss raising the retirement age. It is no longer strange for a man or women to work through their sixties. Additionally, we must address the way pension funds are protected. As Chris Tobe of Forbes Magazine explains here (link#2), private companies, and many non-profit organization pension programs are insured by the “Pension Benefit Guarantee Corporation (PBGC) and regulated by the Department of Labor Employee Benefits Security Administration (EBSA), which operates under the law known as the Employee Retirement Income Security Act (ERISA).” However, local and state governments fail to allow the Federal Government to insure their pension programs. This has made them easier to leave unfunded and left the beneficiaries of those programs susceptible to retirement ruin.

Americans rely on their pensions. Making promises without following through and funding them is morally reprehensible if not altogether criminal. Not only are the people who have seen their promised pensions disappear overnight suffer, but so do their recently (or soon to be recently) graduated children. This has real repercussions today and in the future, especially in a fragile economy. It is possible that the slow economic growth seen over the past 4 years will in the near future seem like break-neck speed.

20-something year olds are leaving school drowning in student loan debt to find an anemic jobs market. These students will, for years, be saving every penny just to pay off the loans that for many will seem never ending. Add a poor paying job to the already heavy chains of student debts and rather than saving money, building strong credit and growing an economic profile through their 20s and 30s, these young people will instead be postponing the usual economic development typical of people their age. By the time they reach their late 30s and 40s, instead of starting a family, buying a home, car, new appliances and golf clubs, they will only have begun to develop their financial egg. Rather than experiencing their economic primes, 40-something year olds will be just beginning their economic journey. This spells trouble for economic recovery. Add the financial liability of caring for your parents? That spells economic disaster.

If pensions across the country do not provide what people are expecting, the elderly in our community will not only be forced into the margins of our society, but they will be forced, economically, to rely upon their children, the same children who didn’t begin to develop their economic egg until they were 40. These children, currently 20-somethings and younger, may never experience their own economic prime, resulting in the creation of an economically invisible generation. The weights of student debt, poor jobs markets and parents made financially reliant due to vanished pension promises will prove too much to bear. Generation Invisible will find itself constantly fighting against the tide, struggling to stay above water and never able to reach paradise island.

This is a vast, complicated and nuanced issue. There is no quick fix. But the first step to addressing it could be to address poorly funded pension systems across the country. We must stop the negligent treatment of our soon to be retirees. To treat them well is to treat all generations well. But if we continue to allow poor policy, corrupt politicians and neglect to plague our pension systems, America will become the home of the brave, the free, and the invisible.