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Is your public pension at risk?

By Jennie L. Phipps · Bankrate.com
Thursday, December 5, 2013
Posted: 1 pm ET

Municipal and other public pensions took a legal and legislative whammy in the last few days.

A U.S. bankruptcy judge in Detroit ruled that the federal bankruptcy law trumps any protections afforded by Michigan's constitution. According to Barron's Income Investing blog, Moody's, the bond-rating service, summed up the potential nationwide impact of the decision:

The court held that the city may reduce accrued pension benefits because federal bankruptcy law, which allows for the impairment of contracts, will supersede the state constitutional language that prevents diminishment or impairment of earned benefits. Today's ruling sets an important judicial precedent establishing that pension benefits are unsecured contractual claims in Michigan and could be cited as precedent in other jurisdictions.

Meanwhile, two states away, the Illinois legislature mustered enough votes from both Democrats and Republicans to overhaul the deeply indebted state pension plan, which is only about 40 percent funded. The deal will cut benefits to retirees as well as current workers in order to shore up the pension system over the next 30 years.

If you are receiving a public pension -- or expecting one -- this is unsettling news no matter where you live.

Mark Mitchell, a Certified Financial Planner and retirement planning expert in the Detroit suburb of South Lyon, is a retired police officer. Many of his clients are also current and former public employees. In the wake of the action in Detroit, his phone has been ringing off the hook. He's been telling these anxious people -- who are worried about their retirements -- to stay calm.

"I'm saying, 'Don't do anything rash. This isn't the final straw because there is going to be a court appeal and that is going to take a long time,'" he says.

He also points to recent court decisions in San Bernardino and Stockton, Calif., two other cities facing bankruptcy, where courts have been more sympathetic to pensioners.

In the meantime, Mitchell is emphasizing to his clients the importance of maximizing the defined contribution plans most have in addition to their defined benefit pensions. These plans are similar to 401(k) plans but are labeled 457 plans when they are held by government employees.

"I'm telling people their 457 plans are federally protected. Nobody can go after them. They can't be attached by creditors. This is their money and their safeguard," Mitchell says.

For some, this will be nearly all they have because they didn't pay into Social Security. And even if they did have outside jobs that were covered by Social Security, what they are entitled to is greatly diminished by WEP, the Windfall Elimination Provision, a federal law that limits double dipping by public employees.

While he doesn't believe many public pensioners will actually lose their benefits, he does urge all of them to engage in smart retirement planning -- whether their current or former employer is in financial trouble or not. "One or two bad administrations can ruin everything," he says.

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14 Comments
Robin Williams
December 08, 2013 at 6:53 pm

This ruling must not stand. It would essentially relegate older Americans to living impoverished or not being able to survive at all. Organized labor must unify and shut the nation down with sit-down strikes a la the 1930's if they try to touch public pensions.

Dawn
December 08, 2013 at 5:30 pm

Detroit pensioners are NOT double dipping. What many do not know is that in Detroit, City employees were NOT ALLOWED to pay into social security, even if they wanted to. They had to pay into the city plan. And they were not allowed to "moonlight" taking other jobs so that they were paying into social security. They do not make 100% of their final salary, either. Part of the money IN that city plan came from the employees contributing to it. So now Detroit wants to say sorry-we didn't :ET you pay into social security, but we're not going to pay you a pension, either. And for many years, Detroit police and firefighters were very poorly paid, as well. And they had to live within city limits, having to pay city income taxes as well. If the city hadn't been so poorly managed,run by criminals who turned it into a totally dependent-on-federal-subsidies existence, hiring unqualified relatives and friends at high salaries, they wouldn't be in this situation. So why do the pensioners have to pay for that?? And if you don't believe that happened, google Kwame Kilpatrick, who sits in federal prison for his exemplary leadership.

Don
December 08, 2013 at 12:23 pm

FDR was completely against Public Employee Unions for the very reason that we see in Detroit. Politicians sold their votes with taxpayers money, without any thought of how it would effect the future. Retirees have the best pension and healthcare in the world. Until the municipality runs out of money. Don't expect a bailout.

mdelfert
December 08, 2013 at 11:06 am

time for a peoples revolution.

June
December 08, 2013 at 8:28 am

Yet Another example of "the many" having to pay for the horrible decisions made by "the few." What is past is past. Move forward and look for future ways of building revenue thru cutbacks. I have never heard of a public, state, or federal job that gives 100% salary in retirement. Those must be few and far between and if so, would make little impact on Improving the country's debt.

Sonny
December 08, 2013 at 8:03 am

Unfortunately some of these pensions promised 100% of final salary which is ridiculous. Some of the salarys were artificially high due to fake overtime. Also some of these non industry workers skipped work, did other work while "on the job", and de-frauded the tax payers while the city systems seldom dealt with the fraud. Often you get what you deserve (or less).

June
December 08, 2013 at 7:59 am

I am sick and tired for paying for the bad decisions and choices the govt has made in the financial and budgeting areas. For cripes sake, they get away with displaying such paramount inadequacies and mistakes that ANY of us regular working people would be fired for! I don't think that current retirees public pensions should be penalized in any way.....we each gave 30+ years of dedicated service with the promise of that pension. What I suggest is they grandfather and keep in place the agreements made for all those people already retired and start amending pension contracts for current and future employees. It is time that govt holds true to their promise and obligation to protect ALL Americans. It is actually sickening to think about how much money some people have (such as so called celebrities on these ridiculous reality shows like Jersey Shore, Keeping Up With The Ksrdashians, etc.). and yet the majority of us can't even seem to make ends meet with low pay and rising food and living costs. I guess one could say it is just the govt following the same path as much of society.......supreme narcissism!

Bruce
December 08, 2013 at 7:57 am

White House --- White Wash ??? Hmmmm.

Bruce
December 08, 2013 at 7:55 am

You make an excellent point. Common people who receive retirements, especially those with defined benefit plans, are vilified to cover up for the greed and ineptness of those (usually politicians) with the fiscal responsibility for those plans. When the plan balances were 'up' the call was, 'how do we spend this excess money?'. But when the markets turned as they always do, and the money that was spent for reasons other than the plan is now needed, somehow that is the retiree's fault? This white-washing of the true reason retirement plans, including Social Security, are in an 'unfunded' status is because of greed and corruption.

Hear the truth in my words!

WILLA
December 08, 2013 at 6:35 am

THE FEDERAL/CONGRESS has no business creating a law of WEP, double dipping. That law keeps people from creating a good financial life for themselves and it is not fair.

That is only to keep the SSA pension money for themselves to throw away on other stupid things and give to other people who did not put into the SSA system payments, especially foreigners.

If a person goes out and work 2-3 jobs and get a retirement check this is great for what they have done for themselves to build a good retirement for themselves.

And any job other than government, takes out SSA from their employees. How is that double-dipping? They worked for it and put the time in for it. No body is giving them anything free, their labor and time did that.

The governmetn is not for the people but only for their greedy selves - congress who controls all the money, makes the laws and rule how money is supposed to be dispensed,

There needs to be another way that a person can work 2-3 jobs and get their pension without the government putting their 2 cents into it and taking their money, any percentage of it. THey don't deserve it. It is legal theft.

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