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Detroit raises retirement risk

By Jennie L. Phipps · Bankrate.com
Monday, July 29, 2013
Posted: 5 pm ET

With Detroit headed to bankruptcy, the decisions made about this case could have an impact on the retirement of state and municipal employees everywhere.

A key question to be decided is whether pensions are protected from bankruptcy. The Michigan constitution says state and municipal pensions "can't be diminished or impaired." While that sounds like a clear defense, this phrase may not be enough, explains Brad Reynolds, chief investment officer for LJPR, a suburban Detroit wealth management firm that specializes in retirement planning. "Deciding whether the federal bankruptcy law trumps the state constitution is going to be a protracted legal battle," he predicts.

If the federal courts decide that Michigan's constitution doesn't protect insolvent government pensions, then not only are Detroit employees and pensioners at risk, but workers and retirees in other financially stressed regions could also see changes in their pensions and retiree health care. "I don't think there would be a 180-degree change all of a sudden, but this decision will have an impact," Reynolds says.

Another Detroit pension debate that could have broader implications is the argument over how big the pension liability actually is. Depending on who is doing the math, the obligations range from $650 million to $3.5 billion. One big issue is how much the annual return on invested assets is likely to be. The optimistic estimate is 8 percent a year, but many insist this percentage is too high given investment returns over the last 10 years. The lower the estimate, the higher the debt -- in Detroit and elsewhere.

A third issue is the status of Detroit's pension general obligation bonds. Historically, the municipal bond market and investors have viewed these bonds as a safe investment because municipalities can always raise taxes to pay debts. But the proposal to restructure the city's debt says these bonds are unsecured and plans to offer bondholders pennies on the dollar. If this classification is upheld by the court, it will have far-reaching implications, not just for other troubled municipalities, but the municipal markets in general, says Reynolds.

None of this is good news for anyone saving for retirement -- wherever they live.

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3 Comments
artist
July 30, 2013 at 9:47 pm

Yes, Ronald. Great idea. The Fed Gov't has done wonders with SS, Medicare and Medicaid. And they have done a stellar job with the federal budget.

Let's give them the entire healthcare system.

Norman
July 30, 2013 at 9:47 am

Hello and Good Morning, Does the Government use Social Security other than Social Security? If they do why and do they pay it back with interest it is our money they are borrowing just like when you borrow from your 401 or 457 you borrow your own money and pay it back with interest? Why should they borrow from S.S. anyway?

Ronald Becker
July 30, 2013 at 9:46 am

I'm a GM retiree and have lost my extended care coverage, vision, hearing and drug coverage along with a premium healthcare plan. I now have medicare.
State and federal employees said nothing as our benefits were reduced or stripped away. They are under the opinion their benefits are different and exempt from cuts. I find little sympathy for their cause. This only exemplifies the need for "National health care" for all. We need to improve upon health care systems that all other industrial nations provide.

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