Upward social and economic mobility used to be a hallmark of America’s working classes.
American workers pursuing these values typically came to the negotiating table in “good faith” when they bargained with capital for higher wages and benefits. But those clutching the purse have had little taste for such idealism – economic justice has never been America’s strong suit.
The current plight of the city of Detroit’s pension funds is an example. We could cite Chicago, Portland, New Orleans or 58 other cities facing pension shortfalls totaling $99 billion. But Detroit is closer to home, and here I acknowledge I am personally affected by this issue.
Several generations of municipal employees concluded at various times that they needed – and were entitled to – a pay raise. They counted on the city’s power of taxation as a ready source of additional revenue. Threatening to strike, the employees’ unions could drive a hard bargain. But the municipality countered it could not afford more pay, there was no additional money, and it would be political suicide to raise taxes to support workers’ demands.
Both unions and the city found more comfortable negotiating turf moving the debate from cash now to benefits later: retirement and healthcare packages could enhance the workers’ ability to live with dignity, having their needs cared for in retirement.
During the 1950s-1980s, defined benefit pension plans were popular because at the time of retirement each employee would receive a specific amount of money each year for the rest of his or her life. The benefit was therefore “defined,” and the employee contribution was a percentage of each paycheck during working years. City employees liked having everything cast in concrete.
The city of Detroit carried two continuing responsibilities. The city was obligated to pay a certain amount to the pension fund each year. This is called the “annual required contribution” (ARC). The city was also to manage pension fund assets, seeing they were prudently invested, so when the time came, the money would be there to pay retirees what their contract specified.
City employees were satisfied: they received a little more pay, and a lot of future benefit, as it was said, “at the city’s expense.” Good victory for the union, right?
But two problems arose. First, no city administration lasts forever. Through successive generations of elected city officials, when money got tight, the ARCs weren’t fully paid, and there was no stomach for raising revenues from a diminishing and ever-poorer taxpaying public. Second, there were inconsistencies in managing pension fund assets.
Now we have a bankrupt Detroit facing a mountain of “unfunded pension liability” – there is not enough money to pay retirees what the city owes them. Those city employees are about to have their retirement benefits mercilessly, and unconstitutionally, whacked by the bankruptcy court.
Thousands of former city employees will suffer deplorably reduced retirement benefits.
The lesson here is not that the unions were wrong to strike and bargain for pay raises and benefits, or that defined benefit plans should be scrapped. It’s that the city employees rested comfortably in the belief that their contracts and Michigan’s state constitution would protect them, while city officials failed to fulfill their responsibility as specified in contracts signed with the unions.
What’s more, when we put our future in the hands of capital, the unknown contains the seeds of deceit and mismanagement. Perhaps, if the unions had mounted repeated campaigns of direct action, better results might have been realized. But whereas our laws protect contracts between and among business interests, agreements with employees are easily broken. Nowhere is this more plainly seen than in the decisions of the governor, the emergency manager and the bankruptcy court judge. Economic justice has now been strangled by our privileged elites
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