Skip to main content

After Detroit, how about 401(k)s for public workers?

By Matthew Brouillette, Special to CNN
updated 3:23 PM EDT, Tue September 3, 2013
STORY HIGHLIGHTS
  • Matthew Brouillette: Detroit's pension mess is a warning to other cities and states
  • Brouillette: Solution is to switch to 401(k) plans which is common in the private sector
  • He says market risks of 401(k)s require more personal responsibility for workers
  • Brouillette: If cities and states keep the pension system, it will be too costly in the long run

Editor's note: Matthew Brouillette is the president and CEO of the Commonwealth Foundation, a free market think tank in Pennsylvania.

(CNN) -- As another Labor Day comes to pass, it's worth reflecting on the legacy of Detroit and its workers.

Detroit's bankruptcy is a warning to other cities -- and even states -- that public pension systems are a ticking time bomb with potentially catastrophic consequences.

Unfunded pension debt, which in Detroit stands at $3.5 billion and is roughly one-sixth of the city's total debt, is a national problem that has already put other city and state governments on the same road to insolvency.

Matthew Brouillette
Matthew Brouillette

The problem is being ignored amid a rash of finger-pointing and blame-shifting. Few are calling for the kind of pension reforms that could prevent other places from encountering the Motor City's crisis.

Quite simply, cities and states need to consider switching from the prevailing "defined benefit" pension plans to the "defined contribution" plans common in the private sector. This single fix could drastically change the course of a government's financial health by making retirement plan for public-sector workers affordable for taxpayers and predictable for actuaries.

First, consider the illness. Detroit's pension debt pales in comparison to the hundreds of billions of dollars that other cities and municipalities owe their pensioners.

Opinion: Detroit, the 'used to be' city

New York City, for instance, is much worse off than Detroit, with some $69.9 billion in pension debts. The only difference between the Big Apple and the Motor City is that it the former has a burgeoning economy that masks the looming crisis, keeping the tax bill at bay even as the pension debt grows larger.

Detroit files for bankruptcy
Mitch Albom: Detroit is not Atlantis

Worse yet, city pension debt is dwarfed by that of state pension debt.

In Pennsylvania, the unfunded total in the state's two pension funds is $47 billion. Next door, New York faces pension debts of $133 billion, while Illinois' clocks in at $167 billion. California is the worst, with $370 billion in unfunded pension liabilities.

Combined, city and state unfunded pension debts amount to $4.6 trillion, according to an analysis published by State Budget Solutions, a conservative-leaning group.

The crisis is recognized by many, but unfortunately, most of the proposed solutions are either shortsighted or just plain silly. In Illinois, for instance, Gov. Pat Quinn at one point suggested a federal bailout of the state's pension debt, a call that has been echoed by many for Detroit. Given the federal government's own fiscal problems, this proposal has been dismissed as irresponsible.

Tax increases are another option. One analysis estimated that an average tax hike of $1,385 per household would be required to fix the debt. In my home state of Pennsylvania, we estimate that working families will soon need to contribute an additional $878 per year to pay rising pension costs -- a devastating blow to those still recovering from the recession.

While the problem is already enormous, it will only get worse in the coming years unless governments transition to defined contribution systems, like the 401(k).

RoboCop creator: Detroit shows the film's fictional future is upon us

Both defined benefit plans -- which purport to guarantee a set income for life -- and 401(k)-type plans carry with them some risk for public employees. In the case of defined benefit plans, Detroit shows that taxpayers may not always be able to pay what the government promises.

As for the 401(k), individual retirement investments are subject to the ups and downs of the market, requiring more attention, planning and personal responsibility on the part of the employee.

The private sector, being more responsive to market pressures, realized the dangers posed by defined benefit plans and the benefits of 401(k)s long ago and acted accordingly. From 1979 to 2011, the percentage of businesses offering defined benefit plans plummeted from 62% to a mere 7%. Over the same period, defined contribution plans more than quadrupled from 16% to 69%.

Businesses made these changes because defined benefit plans are unpredictable, inefficient and too costly in the long run. But cities and states aren't so different: They can pass costs on to taxpayers and their children only for so long, until eventually --as in Detroit -- the bill comes due.

Unfortunately, Detroit's public pensioners will likely pay this bill themselves when their pensions are cut in bankruptcy proceedings. They need only look to San Bernardino, California, which received court approval to do just that on August 28.

Opinion: How Detroit can rise again

But other cities and states can still prevent the crisis from boxing their own public workers into a similar financial bind. If governments across the nation seize the moment and make the change to a defined contribution system -- as Pennsylvania is poised to do this fall -- they'll save their citizens from a fate like Detroit's, where opportunity and prosperity have been replaced by bankruptcy and hoped-for bailouts.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Matthew Brouillette.

ADVERTISEMENT
Part of complete coverage on
updated 2:45 PM EDT, Thu April 17, 2014
Michael Bloomberg and Shannon Watts say Americans are ready for sensible gun laws, but politicians are cowed by the NRA. Everytown for Gun Safety will prove the NRA is not that powerful.
updated 9:28 AM EDT, Thu April 17, 2014
Ruben Navarrette says Steve Israel is right: Some Republicans encourage anti-Latino prejudice. But that kind of bias is not limited to the GOP.
updated 7:23 PM EDT, Wed April 16, 2014
Peggy Drexler counts the ways Phyllis Schlafly's argument that lower pay for women helps them nab a husband is ridiculous.
updated 12:42 PM EDT, Wed April 16, 2014
Rick McGahey says Rep. Paul Ryan is signaling his presidential ambitions by appealing to hard core Republican values
updated 11:39 AM EDT, Wed April 16, 2014
Paul Saffo says current Google Glasses are doomed to become eBay collectibles, but they are only the leading edge of a surge in wearable tech that will change our lives
updated 2:49 PM EDT, Tue April 15, 2014
Kathleen Blee says the KKK and white power or neo-Nazi groups give haters the purpose and urgency to use violence.
updated 7:56 AM EDT, Wed April 16, 2014
Sen. Sheldon Whitehouse and Rep. Henry Waxman say read deep, and you'll see the federal Keystone pipeline report spells out the pipeline is bad news
updated 7:53 AM EDT, Wed April 16, 2014
Frida Ghitis says President Obama needs to stop making empty threats against Russia and consider other options
updated 5:29 PM EDT, Tue April 15, 2014
Peter Bergen and David Sterman say the Kansas Jewish Center killings are part of a string of lethal violence in the U.S. that outstrips al Qaeda-influenced attacks. Why don't we pay more attention?
updated 12:41 PM EDT, Tue April 15, 2014
Danny Cevallos says families of the passengers on Malaysian Airlines Flight 370 need legal counsel
updated 11:23 AM EDT, Mon April 14, 2014
David Frum says Russia is on a rampage of mischief while Western leaders and Western alliances charged with keeping the peace hem and haw
updated 7:56 AM EDT, Mon April 14, 2014
Most adults make the mistakes of hitting the snooze button and of checking emails first thing in the morning, writes Mel Robbins
updated 1:54 PM EDT, Mon April 14, 2014
David Wheeler says as middle-class careers continue to disappear, we need a monthly cash payment to everyone
updated 7:55 AM EDT, Mon April 14, 2014
Democrats need to show more political spine when it comes to the issue of taxes.
updated 11:55 AM EDT, Mon April 14, 2014
Donna Brazile recalls the 50th Anniversary of the Civil Rights Act as four presidents honored the heroes of the movement and Lyndon Johnson, who signed the law
updated 9:17 AM EDT, Mon April 14, 2014
Elmer Smith remembers Chuck Stone, the legendary journalist from Philadelphia who was known as a thorn in the side of police and an advocate for the little guy
updated 2:56 PM EDT, Sun April 13, 2014
Al Franken says Comcast, the nation's largest cable provider, wants to acquire Time Warner Cable, the nation's second-largest cable provider. Should we be concerned?
updated 11:22 AM EDT, Fri April 11, 2014
Philip Cook and Kristin Goss says the Pennsylvania stabbing attack, which caused grave injury -- but not death, carries a lesson on guns for policymakers
updated 3:06 PM EDT, Fri April 11, 2014
Wikipedia lists 105 football movies, but all too many of them are forgettable, writes Mike Downey
updated 10:32 AM EDT, Fri April 11, 2014
John Sutter and hundreds of iReporters set out to run marathons after the bombings -- and learned a lot about the culture of running
updated 12:49 PM EDT, Fri April 11, 2014
Timothy Stanley says it was cowardly to withdraw the offer of an honorary degree to Ayaan Hirsi Ali. The university should have done its homework on her narrow views and not made the offer
updated 10:16 AM EDT, Fri April 11, 2014
Al Awlaki
Almost three years after his death in a 2011 CIA drone strike in Yemen, Anwar al-Awlaki continues to inspire violent jihadist extremists in the U.S, writes Peter Bergen
updated 9:21 PM EDT, Fri April 11, 2014
David Bianculli says Colbert is a smart, funny interviewer, but ditching his blowhard persona to take over the mainstream late-night role may cost him fans
updated 1:31 PM EDT, Thu April 10, 2014
Rep. Paul Ryan says the Republican budget places its trust in the people, not in Washington
updated 5:28 PM EDT, Thu April 10, 2014
Aaron David Miller says Obama isn't to blame for Kerry's lack of progress in resolving Mideast talks
updated 11:22 AM EDT, Mon April 14, 2014
David Weinberger says beyond focusing on the horrors of the attack a year ago, it's worth remembering the lessons it taught about strength, the dangers of idle speculation and Boston's solidarity
updated 12:32 PM EDT, Thu April 10, 2014
Katherine Newman says the motive for the school stabbing attack in Pennsylvania is not yet known, but research on such rampages turns up similarities in suspects and circumstances
updated 2:39 PM EDT, Wed April 9, 2014
Wendy Townsend says the Rattlesnake Roundup -- where thousands of pounds of snakes are killed and tormented -- is barbaric
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT