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Detroit has shown that the promises of politicians don't last 30 years.
Detroit pension meltdown a wake-up call for Canadians
Detroit pensioners woke up last Friday to shattered retirement dreams, and the haunting question that people around the world are now asking themselves is, "What about mine?"
In its bankruptcy filing last week, the city declared its pension and benefit commitments to be part of its debt, leaving a Federal judge to decide how to distribute Detroit's remaining assets between pensioners and other creditors.
From a business point of view it is all quite rational. Over the years, the city government made more promises than it could possibly afford to pay. About $18 billion more.
But there's more happening here than rational business decisions. In bankruptcy, when there just isn't enough money to go around, each of the creditors takes a share of the hit. This time they are expected to get between 10 and 20 cents for every dollar they are owed — and that includes the city's pensioners.People who have worked a lifetime for the city, responsibly choosing a job and sticking with it because they knew it included a safe pension, abruptly have to think again.
They could have taken their skills and commitment elsewhere, taken risks and pursued more adventurous jobs, sailed around the world or lived cheap on the beaches of Goa, or taken a flyer on a career as an actor or novelist. In other words, they could have lived like the grasshopper instead of the ant in the Aesop's Fable — making enough for a roof and entertainment week to week but never setting a penny aside for the long winter ahead.
And eventually relying on social assistance in their old age. As the Wealthy Barber author David Chilton has said, people without a pension generally don't save enough.
But the pension contributors in Detroit weren't the fabled grasshoppers, they were the ants. They were the responsible ones who considered the future and planned ahead so they could pay their own way. They chose jobs with salary agreements that included the promise of a fund for their retirement.
Every month money was taken from their pay. Every month, the paperwork showed that their employer had added its share to the pension pot. Periodically a form would arrive in the mail telling them how much they would get if they continued working until the age of 65. But all the time the paperwork was a lie.
And as I mentioned last week, there is a growing view that the crisis in Detroit may not be unique, that there are more public-sector bankruptcies to come. Others have weighed in on the subject since, some seeming to blame pensioners for the growing potential financial crisis, saying they are taking more than their share.
The point they're missing is that pensions are crucial to a healthy economy.
As everyone keeps telling China, until the country develops a reliable social safety net, a consumer-led society can never take off. Employees must be able to trust their pensions will actually be there when it comes time to draw on them, or their ant-like personalities will force them to hoard even more when they're working, instead of recirculating that cash into the economy.
And safe pensions do exist. The best ones are those that money managers give themselves.
In this type of blue ribbon pension there is no promise to pay on some future day. The money is set aside in a separate account. It is well managed in diversified investments. Its future value, and thus the amount added to the fund each year, is determined by realistic long-term rates of interest. It is not based on a 30-year-old promise by some now-defunct politician and subject to the whims of whoever is calling the political shots today.
Detroit has shown that the promises of politicians don't last 30 years. And neither do the promises of companies.
Canada's own Nortel, the airlines and the Detroit auto makers themselves are just a few of the private firms proving that promises given years ago to inspire loyalty when workers were desperately wanted are worth nothing when the workers are no longer needed.
As the blue-ribbon pensions show, money actually set aside and invested wisely over a 40-year working life provides a reliable retirement income. Stocks really do return 8 per cent over the long term. Bond returns are low now, but many years in the last 40, bonds were paying double-digit rates.
But as with those blue ribbon pensions, the secret is that the money must actually be set aside and invested by honest, qualified professionals. Pension funds that do that, like the Ontario Teachers Pension Plan, or the Canada Pension Plan, provide reliable returns.
Without that, a promise to pay is only as good as the changing fortunes of the organization making the promise.
Pensions backed by promises from governments with relatively low debt, like Canada's, are safe for now. And as CBC's Amber Hildebrandt has reported, in Canada cities are backed by their respective provinces if things go sour.
Other governments and companies are not in such good shape. In the wake of Detroit, employees and unions making deals with healthy governments and private sector employers must learn not to accept promises. They must demand that cash be set aside now, placed in a well-run fund, and managed for the long term.
Either that or the ants might as well join the grasshoppers. Buy a sailboat, and don't come home till you are old and sick and looking for social assistance.
Detroit pension meltdown a wake-up call for Canadians
Detroit pensioners woke up last Friday to shattered retirement dreams, and the haunting question that people around the world are now asking themselves is, "What about mine?"
In its bankruptcy filing last week, the city declared its pension and benefit commitments to be part of its debt, leaving a Federal judge to decide how to distribute Detroit's remaining assets between pensioners and other creditors.
From a business point of view it is all quite rational. Over the years, the city government made more promises than it could possibly afford to pay. About $18 billion more.
But there's more happening here than rational business decisions. In bankruptcy, when there just isn't enough money to go around, each of the creditors takes a share of the hit. This time they are expected to get between 10 and 20 cents for every dollar they are owed — and that includes the city's pensioners.People who have worked a lifetime for the city, responsibly choosing a job and sticking with it because they knew it included a safe pension, abruptly have to think again.
They could have taken their skills and commitment elsewhere, taken risks and pursued more adventurous jobs, sailed around the world or lived cheap on the beaches of Goa, or taken a flyer on a career as an actor or novelist. In other words, they could have lived like the grasshopper instead of the ant in the Aesop's Fable — making enough for a roof and entertainment week to week but never setting a penny aside for the long winter ahead.
And eventually relying on social assistance in their old age. As the Wealthy Barber author David Chilton has said, people without a pension generally don't save enough.
But the pension contributors in Detroit weren't the fabled grasshoppers, they were the ants. They were the responsible ones who considered the future and planned ahead so they could pay their own way. They chose jobs with salary agreements that included the promise of a fund for their retirement.
Every month money was taken from their pay. Every month, the paperwork showed that their employer had added its share to the pension pot. Periodically a form would arrive in the mail telling them how much they would get if they continued working until the age of 65. But all the time the paperwork was a lie.
And as I mentioned last week, there is a growing view that the crisis in Detroit may not be unique, that there are more public-sector bankruptcies to come. Others have weighed in on the subject since, some seeming to blame pensioners for the growing potential financial crisis, saying they are taking more than their share.
The point they're missing is that pensions are crucial to a healthy economy.
As everyone keeps telling China, until the country develops a reliable social safety net, a consumer-led society can never take off. Employees must be able to trust their pensions will actually be there when it comes time to draw on them, or their ant-like personalities will force them to hoard even more when they're working, instead of recirculating that cash into the economy.
And safe pensions do exist. The best ones are those that money managers give themselves.
In this type of blue ribbon pension there is no promise to pay on some future day. The money is set aside in a separate account. It is well managed in diversified investments. Its future value, and thus the amount added to the fund each year, is determined by realistic long-term rates of interest. It is not based on a 30-year-old promise by some now-defunct politician and subject to the whims of whoever is calling the political shots today.
Detroit has shown that the promises of politicians don't last 30 years. And neither do the promises of companies.
Canada's own Nortel, the airlines and the Detroit auto makers themselves are just a few of the private firms proving that promises given years ago to inspire loyalty when workers were desperately wanted are worth nothing when the workers are no longer needed.
As the blue-ribbon pensions show, money actually set aside and invested wisely over a 40-year working life provides a reliable retirement income. Stocks really do return 8 per cent over the long term. Bond returns are low now, but many years in the last 40, bonds were paying double-digit rates.
But as with those blue ribbon pensions, the secret is that the money must actually be set aside and invested by honest, qualified professionals. Pension funds that do that, like the Ontario Teachers Pension Plan, or the Canada Pension Plan, provide reliable returns.
Without that, a promise to pay is only as good as the changing fortunes of the organization making the promise.
Pensions backed by promises from governments with relatively low debt, like Canada's, are safe for now. And as CBC's Amber Hildebrandt has reported, in Canada cities are backed by their respective provinces if things go sour.
Other governments and companies are not in such good shape. In the wake of Detroit, employees and unions making deals with healthy governments and private sector employers must learn not to accept promises. They must demand that cash be set aside now, placed in a well-run fund, and managed for the long term.
Either that or the ants might as well join the grasshoppers. Buy a sailboat, and don't come home till you are old and sick and looking for social assistance.
