The Broken Promise of Retirement

After almost thirty-eight years as a technical assistant at a Detroit public library and six years of retirement, Barbara Yokom found herself, in 2018, stocking shelves at big box stores. She was sixty-three. The heavy lifting was a daily difficulty, and she hadn’t expected to be working at all. For decades at the library, doing her part to help Detroiters educate themselves, Yokom had anticipated that her pension would sustain her in retirement. She even, little by little, put extra money into a city-run annuity, a savings plan that would supplement it. “I’ve never lived an extravagant lifestyle,” she told a reporter at the Detroit Free Press. She couldn’t have foreseen that the city she had served would go broke.

Detroit entered bankruptcy in 2013. Although its pension system had been solvent as recently as 2002, eleven years later it faced a shortfall of $3.5 billion. Yokom’s pension payments were reduced, and her health care costs skyrocketed. To avoid having her benefits slashed even more, she paid the city nearly $45,000 in a “clawback” of the annuity program.

Pensions represent more than their economic value. They carry a powerful moral recognition: workers deserve financial stability and the freedom it brings throughout their lives. Municipal and state employees contribute to their pensions with every paycheck, and employer contributions supplement their savings. Earnings from investments, however, make up close to three quarters of the resources that states and cities count on to pay future retirees. It is up to them and their investment funds to ensure that they can cover those legal obligations when they come due.

For decades, conservative governors and state legislators—sometimes abetted by liberal politicians—have worked to undermine public employee pensions. They decry profligate government spending, criticizing cities and states for financial commitments that, allied think tanks claim, they will not be able to honor. Cities and states do face challenges in funding their pension benefit obligations; Chicago’s unfunded pension liabilities rose to roughly $25 billion in 2021, and for Illinois the shortfall reached $141 billion. Though many public pension systems are currently solvent, they are still a political target for Republicans because public employee unions, which won and sustain them—and the financial security they provide for their members—form an important Democratic constituency. The Wall Street Journal editorial page once suggested that these unions be labeled “Public Enemy No. 1,” in large part because of pensions.

Last year, as the Covid-19 pandemic raged, Senate Majority Leader Mitch McConnell denied governors’ appeals for federal emergency aid because he saw an opportunity to punish states for their pension debts. He made sure that no federal help would go toward securing state or municipal commitments to retirees. The American Rescue Plan Act, passed this March, included funds to shore up some private pensions, but Republicans insisted that states and cities could not use the monies to support public ones.

Fiscal crises make pensions vulnerable because they deplete the sources of revenue that states and municipalities use to meet their obligations. During the pandemic, restrictions that aimed to slow the spread of the virus curtailed consumer spending. Entire industries, like tourism and live entertainment, shut down practically overnight. Commercial real estate faced plummeting rental income. Local taxes, including those such businesses pay, together with fees for services like parking, make up one of two vital sources of support for municipal governments. The other is contributions from their state governments, which average nearly one third of total municipal revenues. This dependence means that municipalities are subject to decisions made in often distant and unfriendly state capitols. The pain of cities’ reduced revenues, already under stark pressure from the pandemic, will likely be compounded by cuts in state aid.

In January 2021 Mayor Bill de Blasio reported that New York City was projected to lose $10.5 billion in tax revenue in fiscal years 2020–2022. Decreased property values alone will account for a $2.5 billion decline in the coming year. Rochester and Buffalo are likely to lose one fifth of their total revenues, a burden that they are not equipped to withstand and that New York State cannot alleviate on its own, even if Governor Andrew Cuomo were willing. Cuomo said in January that New York is facing a historic $15 billion deficit, and it is not alone. The Center on Budget and Policy Priorities, a nonpartisan think tank, estimates that states could face a cumulative budget gap exceeding $555 billion through 2022.

Aid from Washington is mitigating these projected shortfalls, but the problems will continue, and they are not simply fiscal. Public employee pensions have been crucial to American middle-class life for decades, even as their private counterparts have all but disappeared. In 1980 60 percent of private-sector workers held pensions; today only 12 percent do. Public employment’s guaranteed retirement security has withstood this decline. As of 2019 more than 14 million state and municipal workers nationwide—76 percent of public employees—participated in pension plans.¹ Without pensions to guarantee security through the end of their lives, civil servants would face the precarity suffered by increasing numbers of workers in the United States since the 1980s. Threats to pensions break a promise made to families across generations. We’ve seen it before in Detroit.

The pandemic brought on what The New York Times called an unemployment “heart attack”—New York City alone lost at least a million jobs—that seized urban budgets. Detroit’s revenues, on the other hand, were slowly asphyxiated. Before the city went bankrupt, they had been shrinking for decades.

Detroit’s mid-twentieth-century prosperity was bolstered by a partnership between a thriving, tax-paying auto industry and residents aspiring toward middle-class success. This didn’t last very long. The booming economy drew migrants to the city, including African-Americans who were escaping oppression in the South. The story of Detroit’s fiscal woes is rooted in hostility toward Black communities. In his landmark book The Origins of the Urban Crisis (1996), the historian (and my NYU colleague) Thomas Sugrue demonstrated that as more and more African-Americans established themselves and their families in Detroit—and in cities across the Midwest and North—white residents began to leave, aided by government subsidies that promoted racially exclusive suburbs. White Detroiters destroyed homes and attacked homeowners to try to keep Black families out of their neighborhoods. When that failed, they fled and took their tax payments to towns beyond the city limits.

Then, beginning in the 1960s and accelerating through the early 2000s, the American auto industry collapsed, dealing another blow to Detroit’s financial solvency. Black Detroiters were often forced into low-wage work, if they could find work at all. Those who had managed to save money faced (often white) landlords who cheated them out of their possessions with spurious rent-to-own contracts that subjected their property to seizure for even a single missed payment, or charged them inflated monthly rents in the segregated neighborhoods where they had no choice but to live. As a result of white abandonment, the loss of well-paying jobs, and residents’ stripped assets, Detroit saw its revenues throttled. At the same time, the federal and state governments withdrew from their commitments to aid Detroit and other cities like it.

Detroit was left with overburdened public programs and few prosperous residents to pay taxes. In Detroit Resurrected: To Bankruptcy and Back, the former Detroit Free Press reporter Nathan Bomey writes that, by the time the city declared bankruptcy, garbage collection was infrequent, nearly one of every two streetlights had gone dark, police routinely took as much as half an hour to respond to emergency calls, and tens of thousands of boarded-up houses scarred its neighborhoods. The city’s municipal infrastructure was in shambles, and pension obligations had come to dominate the budget.

Michigan’s conservative governor, Rick Snyder, who was elected in 2011, rejected the idea that civil servants should be allowed to maintain their pension claims, especially when Detroit was cash-strapped. For him and the state legislature, pensions were a fiscal drain and proof of the overweening power of public employee unions. Snyder and his allies saw bankruptcy, which would allow Detroit to pursue more favorable terms for its fiscal obligations, as an opportunity to pry open all of the city’s contracts, especially those with the public employee unions. No major American city had taken this legal plunge before.

First, Snyder deployed a controversial state law that enabled him to take control of distressed cities. Then he installed a handpicked “emergency manager,” an out-of-state attorney named Kevyn Orr, who had the power to negotiate new terms with the city’s creditors, including pensioners. Orr looked to hit pensions hard; he expressed, first privately, that the cut in benefits should be over 50 percent, according to Bomey. When initial negotiations with the unions failed, Snyder declared the city bankrupt. A Chapter 9 filing gave Orr legal recourse for his threats.

For those who work in the private sector, pensions can seem like an artifact of another time. Starting in the 1980s private companies began abandoning their commitment to long-term workers. They instead hired, whenever possible, short-term employees, who were generally cheaper and could rarely band together to fight for higher pay, time off, or improved health insurance. They could not demand retirement benefits that paid a set sum for life.

In the subsequent decade the federal government encouraged the move away from pensions with tax breaks and permissive regulation that encouraged companies to adopt the now familiar “defined contribution” plans, like 401(k)s and 403(b)s. Employers learned that they could increase their bottom line by shrinking retirement expenses. Workers high-ranking enough to require benefits could put a fraction of their salaries into accounts set up by their companies, which could then choose to match a portion of employee contributions. Today, however, only about half of private employers make any kind of contribution at all. In this new regime of do-it-yourself retirement security, employees would not only have to opt into plans directed by large financial firms for profit, they would have to select how much of their salaries to set aside, determine how to invest those funds, and then decide how quickly to spend the money in their final years. Although most employees are not professional investors, they would have to evaluate asset management firms, assess risk profiles, choose mutual fund allocations, and watch their retirement funds grow or shrink with fluctuations in the securities markets. The hazards of funding retirement were now for employees to bear on their own.

For more than three decades, the economist Teresa Ghilarducci, who specializes in retirement economics and policy, has documented this disaster for working people and the crisis it has precipitated, most recently in Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, which she cowrote with Tony James, the former president of the asset management mega-firm Blackstone. She has shown that private-investment retirement accounts were originally designed for upper-tier corporate managers as a supplement to their existing benefits. The idea was to create a tax benefit as an incentive for executives to invest their extra cash. 401(k)s were not intended to establish security for middle- or lower-income Americans. We should not be surprised that these plans have failed them.

In American Bonds: How Credit Markets Shaped a Nation, Sarah Quinn, a sociologist at the University of Washington, demonstrates that federal policy often gets enforced through financial mechanisms like consumer credit and tax “inducements” (really, tax expenditures, since they amount to the loss of government revenue), which make it seem as if individuals and businesses are pursuing their own interests when they take advantage of them. These, she argues, give federal programs an “ideological lightness”—they don’t directly tell anyone what to do or establish explicit expectations. Yet by orchestrating private behavior, tax inducements promote a political agenda, distributing support to some and putting others at a disadvantage. They simply veil their method. The effects of our privatized retirement policy make this clear: 80 percent of the tax benefits go to the top 20 percent of taxpayers.

Pensions have, historically, done more than keep workers securely in the middle class throughout their lives. They have propelled “an intergenerational tale of escape followed by ascent,” Katherine Newman writes in Downhill from Here: Retirement Insecurity in the Age of Inequality. For more than thirty years Newman has written on economic inequality and the dissolution of the American middle class. In Falling from Grace: Downward Mobility in the Age of Affluence (1988), she showed the effect of corporate downsizing on workers’ lives: the problem was not only the loss of a job; it was also frequently the end of a career, with its promise of long-term stability and a foundation for future planning.

Because retirement security supports the aspirations of an entire family, attacks on pensions are just as threatening. For Newman, Detroit’s fight over its municipal workers’ pensions is emblematic of today’s economy. In Downhill from Here, she highlights the story of James Edmond (a pseudonym) and his family to explain how hope for future generations once attracted migrants to the Motor City.² The Edmond family came to Detroit from Mississippi in the 1940s, during the Great Migration. Edmond’s father, aided by a brother who had relocated earlier, found factory work at Ford.

Despite its reputation for solid jobs, the car industry put workers on a “financial rollercoaster,” Newman writes, owing to a recession that led to layoffs at the plants. Soon after his arrival Edmond’s father was thrust out of Ford’s well-paid workforce and turned to the occasional employment that auto-parts suppliers offered. His mother cleaned houses. Together, they managed to maintain a measure of stability. They also encouraged Edmond’s ambitions. At the urging of a high school counselor, and with their support, he applied to college. His test scores qualified him for a National Merit Scholarship, and he enrolled at a historically Black college in the South.

After graduating in 1965 Edmond was determined to succeed in his hometown. He got a job with the Detroit Civil Service Commission as a “technical aide,” what we’d now call a management trainee. In the late 1960s a car company offered him higher pay, and he moved into private employment. He noticed that each time an African-American was allowed to rise, another seemed to be demoted—Black leadership was not welcome. When a downturn loomed with the gas shortage of 1973, he was laid off, so he took the civil service exams and, with his high scores, got a job as the head of human resources for a major city department. Municipal positions surely suffered from superiors’ white favoritism too, but he embraced the opportunity to direct economic development programs that would serve his fellow Detroiters.

In the city where his father had been consigned to the “iron pile,” Edmond was able to follow an upward arc while doing work that he enjoyed. His city pension and health care supported his rise, too: they meant that illness or old age would not threaten the trajectory on which his parents had launched him.

Even when one’s family doesn’t offer as much financial or emotional support as the Edmonds, a pension can mean a predictable life. Newman describes how Patricia Kowalski, a retiree who worked for the city for thirty-five years, yoked her middle-class aspirations to Detroit’s fortunes. Kowalski’s father, a native of Poland, died of a heart attack when she was a girl. Her mother, also an immigrant, struggled to provide for her children. When Kowalski graduated from high school, “the only thing she wanted was a job that could not disappear.” She considered the limited careers open to women with an eye toward a steady income, insurance, a pension, and the protection that comes with them. She chose, like Barbara Yokom, to work in a library. Kowalski could not have anticipated that political maneuvering and financial mismanagement would compromise her security.

Motor City has changed. At the turn of the twenty-first century, after its revenue base contracted with white flight and the auto industry’s implosion, an unholy alliance between the mayor and the financial industry further diminished its prospects. In stable times, cities borrow by issuing bonds, attracting institutional investors like banks and mutual funds that purchase the debt at a small interest rate. The city receives the money and repays both the principle and interest over time, evening out its cash flow. Investor funds enable cities to run buses, pay employees, and honor their pension obligations. Much like home mortgages, issuing bonds should simply bring in cash needed to run the city now that can be paid back later with funds from taxes and fees. But a financial deal that Detroit struck in the early 2000s, Bomey writes, turned out to be both dangerous and decisive.

Detroit was already borrowing heavily from the bond markets to make ends meet—backed, in part, by casino revenue, which is widely considered to be a tax on the poor—when in 2005 Mayor Kwame Kilpatrick launched a search for additional funds. Bankers, looking to increase their limited fees from bonds, convinced Kilpatrick that a more complex deal was in the city’s interest. Detroit sold $1.4 billion in pension obligation certificates of participation—debt—and, at the same time, bought from the banks interest-rate swaps, derivatives that more prudent municipal investors would have considered too risky. Chicago, Orlando, Los Angeles, Oakland, and Denver all purchased swaps from financial salesmen, who promised that the deals would stabilize their budgets; in fact, the swaps left their finances imperiled. In Detroit, the bet was that if interest rates rose on $800 million in city-issued debt, profits on the swaps would cover the increased payments. In 2005 the Bond Buyer, a respected trade newspaper, awarded Mayor Kilpatrick a “Deal of the Year” honor. (In 2013 he was sentenced to twenty-eight years in prison for corruption. Donald Trump pardoned him on his last night in office.)

Three years after Kilpatrick accepted his award from the Bond Buyer, subprime mortgages—derivatives that looked a lot like those interest rate swaps—precipitated an economic disaster. The market crashed and interest rates cratered. Cities now owed banks, paying billions to firms like Bank of New York Mellon, Goldman Sachs, and JPMorgan Chase. In 2013, the moment it declared insolvency, Detroit—already between $18 and $20 billion in debt—agreed to pay an $85 million settlement to UBS and Bank of America Merrill Lynch for the interest rate swaps.

When Detroit entered bankruptcy, 21,172 retired workers had a claim to a monthly check from the city. These did not make for lavish lifestyles—the average yearly compensation was $19,213. The final deal struck by the bankruptcy mediator, Judge Gerald Rosen, cut even these benefits, although pensioners got a much better outcome than Kevyn Orr’s initial proposal, which included a 34 percent pay cut for civilian municipal workers and a 10 percent cut for police and firefighters.

All of Detroit’s civilian retirees eventually lost a portion of their future pension funds. The municipal workers voted to approve pension cuts of 4.5 percent and the elimination of cost-of-living increases. Police and firefighters, who do not receive Social Security benefits, were not asked for reductions to their monthly pension checks, but they did settle for lowered cost-of-living adjustments, which fell from 2.25 to 1 percent. Civilian municipal workers also had to accept the loss of health care coverage. For those who had put away extra money into the annuity plan, like Yokom and six thousand others, the bankruptcy included a punishing surprise. Between 2003 and 2013 the city had paid them “excess” interest on their annuity plans, and they now had to return a total of $190 million to the city.

Bankruptcy requires creditors and borrowers to renegotiate the terms of their contracts and to answer questions of how much is owed and to whom. For banks, this most often means agreeing to take less than the highest amount due, a known risk and standard inconvenience. For municipal workers, however, cuts to pensions represent a moral violation, not simply a financial modification but a betrayal.

State and city leaders have gotten a break from President Biden’s stimulus bill, but funds are still likely to fall short, and governors and mayors have few means to address their budget gaps on their own. Governor Cuomo is considering a project to build a casino in Midtown Manhattan, similar to the one Detroit relies on for revenue. Real estate developers and casino operators have long sought this, and the three licenses New York State has to sell could bring at least $500 million apiece into state coffers, along with a steady stream of coveted tax revenue for the city. Cuomo is wise to consider supplements to federal support. There is no reason to think that congressional Republicans will change their stance on state and municipal assistance.

Those with pensions still hang on to a measure of security that all Americans deserve. But many face the prospect of either a falling standard of living in retirement or working until they die. If the US does nothing to fix its retirement system, 2.6 million formerly middle-class workers will be plunged into poverty by next year, according to Ghilarducci and James in Rescuing Retirement. Others, like Barbara Yokom, will be forced to work well into their old age to meet their basic needs and pay for health care.

Timothy Geithner, the former US Treasury secretary, argues in the foreword to Ghilarducci and James’s book that retirement security is among the most pressing challenges we face as a country—even without further assault from conservative politicians. If the US continues on its current path, the World Economic Forum projects, by 2050 it will lack $137 trillion in savings that retirees will need.

How can we guarantee workers consistent support in their old age? In Rescuing Retirement, Ghilarducci and James promote what they call a “Guaranteed Retirement Account” (GRA), a system of federal retirement savings accounts that would combine features of defined benefit and defined contribution plans. Their plan would make retirement accounts available to all workers, not just those who hold pensions or who are lucky enough to have an employer willing to sponsor a 401(k). Employees and employers would, together, contribute a minimum of 3 percent of the worker’s salary, with the federal government contributing $600 per year and guaranteeing the funds.

GRAs would be professionally invested and would, Ghilarducci and James argue, generate greater returns than existing 401(k)s by taking advantage of access to the more profitable investments and lower fees that large pools of assets can offer. The accounts would follow workers throughout their careers, even if they changed employers. When the time came, the GRA would be transformed into an annuity, which, alongside Social Security, would pay out a consistent and lifelong income. Most importantly, GRAs would offer a steady quality of life, one that workers could rely on from the earliest years of their careers to the end of their lives, while looking to generations beyond.