A Hard Lesson from Motown: They Will Steal Your Pension | Hacker News Reader

A Hard Lesson from Motown: They Will Steal Your Pension

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18 pointscratermoon26 comments

The fun question - where did the money go? We actually know part of the answer - to the pensioners.

The pension plans were funded based on a certain average rate of return. Whenever the yearly rate of return exceeded this amount, pensioners and workers received a "13th paycheck". Whenever the rate of return was below the average, they didn't.

http://www.mlive.com/news/detroit/index.ssf/2013/10/10_thing...

Either the politicians involved were utterly innumerate, or else they were rewarding their cronies (i.e. pensioners) in the hopes of receiving votes. They made their bed, let them lie in it.

I was going to reply with just this. Detroit ran out of money because it was routinely overpaying pensioners for decades. The people who are suffering are the people who've not yet received any pension that they were promised. Many people who were already getting pensions were getting more than they were promised, causing (in part) the bankruptcy.

NYT article from September about just this: http://dealbook.nytimes.com/2013/09/25/undisclosed-payments-...

But you can't change that. That will actively destroy lives :

  "Of all the nonpension payments, she said, 54 percent went
  to active workers, 14 percent went to retirees and 32
  percent went to the city, which used its share to lower
  its annual contributions to the fund. The excess payments
  were often made near the end of the year, when recipients
  needed money for the holidays, or to heat their homes."

  “It would be a human catastrophe of the first order if 
  pensions of vulnerable older workers can be cut whenever a 
  local government goes to bankruptcy court,” Stein said. 
  “We will be consigning firemen and policemen, who did 
  nothing wrong other than protecting the city and depending 
  on the city's promise, into old-age poverty.”

Firstly, the government agreed (in law) to cover this. It is not acceptable for the government to go back on that promise - whatever it takes. Sucks if you're a US taxpayer I guess.

If you're a US taxpayer, either you or your parents (indirectly) agreed to these conditions. It's dishonest going back on them. I'm not a socialist at all, but this is repayment of debt incurred : it's NOT optional.

Having read in history how unions react when their members essentially have the choice between death or getting what they want ... you don't want to go there. They will completely disable the entire country, and frankly, they'd be right to do so.

It was not acceptable for the Detroit Government to do what they already did. Now it's done and the money ran out. All that remains to do is divide what little money remains between the various debtholders.

(Normally bankruptcy also wipes out shareholders and turns debtholders into shareholders, but it's not clear what that would mean in this case.)

I've never been to Detroit, I've never voted there and I'm not sure I could find it on a map. I'm a complete stranger. It's unacceptable to force complete strangers like myself to pay insane debts that they didn't even have the opportunity to vote against, particularly when the debtholders were already paid.

No one will die in the US simply by having their pensions cut. They'll simply have to accept the same standard of living as most non-workers which is roughly the average standard of living in Poland and Mexico and the 95'th percentile of India. Last I checked the Polish, Mexicans and Indians weren't dying off.

Their pensions were contracts, which like any contract are subject to change by a bankruptcy court. So it's legal for the gov't to go back on the promise of pension payments. It's not ideal but the money to pay them simply isn't available. Unfortunately these workers were offered a pipe dream rather than their pension total being fully deducted from their paychecks.

pensions are simply deferred wages, that is, money that workers could have taken as cash in their regular paychecks had they not opted to set it aside.

That is not always the case. Often times in the public sector, pensions have undefined amounts (e.g. set to increase based on an annualized basis), and undefined terms (lifetime of the employee).

So here is another question. Knowing that the city was under dire financial straits, what business did the city have making new hires and promising them impossible compensation, that would result in passing the buck to the next generation?

Also, whilst I don't know how common it is in the US, every employer I've ever had in the UK has thrown into my pension as well, ranging from matching me pound for pound (up to a limit) to matching me two pounds per pound; I certainly couldn't have taken that as cash in my paycheque instead.

In the US it is generally called employer matching. This benefit is starting to be harder to come buy and some people are "grandfathered in" but many companies do have a matching plan to contribute additional money to an employee's 401k, 403b, pension plans, etc.

Some do percentage matching up to a certain percentage of employee's pay. Other do percentage matching up to a certain dollar amount. Some do a hard dollar amount. Some do dollar amount or percentage matching based on years of service. Some do "as profits allow." Some do nothing.

You are correct that this money is only to the retirement account, it would not otherwise be cash in hand at a paycheck.

Great answer about employer contribution to 401k, etc, although I wasn't aware it was becoming less popular.

I'm not familiar with the UK, but in the US there is one important distinction between a pension and individual retirement accounts like a 401k, 403b, IRA, etc. Most pensions are defined benefits, meaning they are not controlled or accessible to the individual, they are, which are a promise for the future with zero individual control. The other instruments are ultimately owned and controlled by the individual.

You are typically limited to using the 401k your current employer offers if you want an employer contribution (which has a vesting schedule) and pre-tax investing, but when you change employers you can roll the money into another retirement instrument. The flip side is all responsibility for investment management, or even having retirement savings, is on the individual. Of course there are many people willing to help you manage it (for a fee).

I don't know how your private sector works, but it is perfectly natural for private pension funds in other parts of the world to offer those kinds of plans. You can exchange cash now for an insurance against living longer than you can otherwise afford. Normally, there's then governmental oversight that tries to ensure, that you can be sure, that the pension fund can actually deliver on their promise.

We have this in the US as well. ERISA and similar laws are the specific regulation. After ERISA and the like were passed, companies generally transitioned from defined benefit to defined contribution pensions since defined benefit pensions were too expensive when honestly accounted for.

Government agencies (except for the USPS) are exempt from these regulations.

This is the entire issue summed up. If pensions were limited in value to the amount payed in + any gains on the principal during the saving period. Then pensions would be simply deferred wages. Instead they are written as "some fraction of your last years wages" (common) or another formula which when applied against actuarial tables means that anywhere from 500 to 1000% of the 'money' that is paid out in pension wages will have to come from some other source. It is this that is the source of the great un-funded pension obligation California is looming under, and the one that did in Detroit. Once you cannot tax enough to pay the pension obligation and provide critical services, you are dead. There is no money, there is no exit other than to liquidate or restructure the pension obligation to something that you can pay. There is no 'stealing' here (unless you mean from working tax payers), there is simply a failed financial promise.

This article is pretty much devoid of facts. Nothing's being taken away. Pensions were promised that couldn't be delivered. Reality is simply being enforced. Corruption was (and is) endemic in Detroit.

http://money.cnn.com/2013/08/28/news/economy/detroit-pension...

Yes, "steal" is definitely the wrong word here. Being unable to pay a debt due to bankruptcy is not theft. If it were, there would be lots of people in prison for not being able to pay their credit card bills.

That's absolutely true, it's called fraud. Agreeing to terms you know you can't live up to.

I wonder if one could do that, sue the old politicians for the difference, given that they did not honestly account for the pensions. This has the advantage of falling under criminal law, so firstly, doing that as part of an organization is not going to protect the individual that did it. Secondly if they get convicted and don't (or can't) pay, they will go to prison.

Karl Denninger has pointed out [1] that these pension benefits that were cut as a result of the bankruptcy were effectively negotiated "at gunpoint and by fraud," and there was no true adversarial process in the negotiations, since the people negotiating for the wages and benefits could and did elect the people on the other side of the table. That alone should render the pensions unenforceable.

However, the judge had to rule that the pensions were not enforceable, Michigan's constitution notwithstanding, because bankruptcy is black-letter Federal law. [2] The pensions are debts like any other, and pensioners have to get in line with all the other creditors.

Anyone with a government pension had better pay attention, and, as the saying goes, "conduct yourselves accordingly."

[1] - http://www.market-ticker.org/akcs-www?post=226468

[2] - U.S. Constitution, Article I, Section 8, clause 4 - http://www.usconstitution.net/xconst_A1Sec8.html

Classic case of the short-sightedness that is endemic in our economy. Management argues for larger pension benefits at the expense of salary increases. Who cares if they aren't realistic long-term? The bottom-line is that they look awesome at the end of the year and get fat bonuses. Of course they leave before the sh*t hits the fan, and the workers who traded those raises for later get shafted when these giant pools of money fail to materialize or were poorly managed.

I think the fate of the pensions is the saddest part of the Detroit bankruptcy. Here are the five options that are possible:

http://www.freep.com/article/20131203/NEWS01/312030138/

The most telling comments were those of the bankruptcy judge who implored why wasn't this done ten years ago? Sure would have been much easier on the retirees if it had been.

to anybody who knows terms like "3@55" and "spiking" and various other details of union contracts like unlimited accumulation of vacation and unused sick days, it isn't a surprise. While i don't know about Detroit, yet if they had anything similar as mentioned below without CA's economy to carry it [not that CA economy will be able to carry it in the long run as well :)], well...

http://www.sacbee.com/2013/09/09/5718823/california-public-p...

" The average retirement payout for new retirees in California's biggest public pension system doubled between 1999 and 2012, according to CalPERS data, and initial monthly payments for one group nearly tripled in that period.

State and local cops and firefighters benefited the most.

In the 14 years covered by the data analyzed by The Sacramento Bee, average first-month pensions to state police and firefighters went from $1,770 to $4,978. California Highway Patrol officers' first-month retirement payments doubled from $3,633 to $7,418, and local government safety employees' pensions went from $3,296 to $6,867. "

I was smart and invested in Social Security. Oh yeah... crap.

Is Social Security mandatory? I've been wondering about this.

If you mean, "can you opt out of paying for it and then not collect benefits when you retire", the answer is no. Your employer is required to withhold it from your salary (or if you're self-employed, you are required to pay the tax yourself).

And a lot of the time, if you’re a Green Card holder, or emigrant citizen, not only are they required to withhold it, but you’re also forbidden from claiming it.

You can squeeze a few thousand retired civil servants, but you can't squeeze all of America. The only solution to an impending Social Security crisis is "monetary easing".

which, of course will screw the rich by draining the stock markets and making institutional lenders poorer.

As a younger professional, I see more and more cases where the system is stacked against me and dysfunctional.

I wonder everyday; why would anyone in their right mind become invested in this system?

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