English: Montage of Detroit images on Commons. Français : Montage d’images sur le Détroit communes. (Photo credit: Wikipedia)

In Chapter 16 of Personal Finance, Turning Money into Wealth, retirement planning is discussed.  In that chapter we discuss defined benefit retirement plans.  To say the least they are great, but problems arise if they aren’t fully funded.  On July 18, Detroit became the largest American city to file for Chapter 9 bankruptcy. Exactly how things will turn out, no one really knows and for the 20,000 plus retired public employees on pensions, it’s a real concern.

According to a recent article in MarketWatch, “State and local government workers with traditional pension plans might want to revisit their retirement-income plans in the wake of Detroit’s filing for bankruptcy,” there is a possibility that their pensions could be significantly reduced.  All this will probably be determined by the courts – while a federal judge is overseeing Detroit’s bankruptcy proceedings, Michigan’s state constitution states that pension benefits can’t be altered.  On July 24, a number of state-court lawsuits brought against the city arguing that the bankruptcy filing was unconstitutional (at the state level) were frozen.

So legally, while it may not be possible for Detroit to scale back pensions for fiscal relief,  that doesn’t mean there will be smooth sailing – just look at the problems Stockton, CA has experienced as outlined in the Time article “The Wages of Bankruptcy: Stockton’s Cautionary Tale for Detroit.”  In the wake of Detroit’s fiscal problems, current and future pension recipients across the country are wondering about the stability and amount of their promised incomes.

But not all states have constitutions like Michigan’s.  For example, in 2011, Central Falls, RI filed for bankruptcy and was able to reduce pension checks by more than 50% to a third of its retirees. As a result, the average retired firefighter’s annual pension income went from $68,414 to $30,786.

Class Discussion:

1.  Any time there is a bankruptcy someone is going to lose. What do you think should happen to the pensions of retired public employees?  Does “making good” on the pensions of retired public employees mean that the other Detroit creditors lose more?

2.  In 2008 Polaroid went bankrupt, this resulted in its retirees receiving pension checks courtesy of the federal Pension Benefit Guaranty Corp. (PBGC) – checks that, as reported in the MarketWatch article, “State and local government workers with traditional pension plans might want to revisit their retirement-income plans in the wake of Detroit’s filing for bankruptcy,” represent “a fraction of what they were supposed to receive.”  In addition, the biggest multiemployer pension fund in America is that of the Teamsters (the Teamsters’ Central States, Southeast & Southwest Pension Plan) – at the end of 2012 it held $17.8 billion in assets while its liabilities were $34.9 billion.  What does all this mean for retirement planning for individuals with pensions?