Detroit’s Bankruptcy Highlights Risks, Benefits of Governmental Pensions (Posted on July 30, 2013 by )

BankruptcyCourtDetroit’s bankruptcy has brought to the fore issues faced by participants in underfunded public (governmental) retirement plans. As explained in an article on CNN, “Just how generous are Detroit’s pensions?”, Detroit’s pension promises as a whole are in line with pensions provided to nongovernmental workers in the area. Nevertheless, as CNN summarizes the situation, “Detroit’s workers and retirees face big cuts.” Why are public workers so vulnerable to the financial troubles of their employers?

Four issues make public employees more vulnerable than private employees in such a situation:

  • Governmental plans, unlike private plans, are not subject to funding requirements under federal law. Consequently, their funded status depends on the requirements of state and local law. And for a locality in financial distress, postponing or avoiding pension payments is often seen as more politically palatable than cutting current programs.
  • Governmental defined benefit plans, unlike private defined benefit plans, are not backed by Pension Benefit Guaranty Corporation (“PBGC”) insurance.
  • Many public sector workers are not covered by Social Security. Thus, their pensions from the employer may represent the only pensions available to them.
  • Public sector salaries overall tend to be lower than private sector ones, even though the average public sector employee is better educated than the average private sector employee. Thus, public sector employees are less likely to have savings to fall back on if their pensions are unavailable.

On the other hand, public sector plan participants have several protections that private sector ones do not:

  • Public sector plans are far more likely than private sector ones to be defined benefit plans. A defined benefit plan promises a particular level of benefits, as opposed to a defined contribution plan such as a 401(k) plan, in which a specified amount of money is put aside, but the ultimate benefit is based on earnings on the amount contributed. This means that public sector employees tend to be more protected from gyrations in the stock market or other investment factors.
  • Benefits of public sector workers have strong federal and state Constitutional protections inapplicable to private sector workers. Those protections have already been raised in the Detroit situation.
  • Public opinion can at least in some instances prevent governmental employers from cutting pensions. Teachers, police, and firefighters typically enjoy high regard from the public, and pressure may be exerted on politicians not to cut their pensions.

Overall, it is hard to judge whether public or private workers have more pension protections. But cases like Detroit’s will prove a test of how committed the public is to protecting those who have served in public employment.