PEORIA -- Nobel prize-winning economist Joseph Stiglitz writing in the New York Times says it all, in the best piece so far on the problems of Detroit. His words on pensions apply to Illinois, as well:
Banks and bondholders will argue that pension payments for city workers are an undue burden, and should be limited or canceled to reduce the banks’ losses. But the high priority that workers are typically given in municipal bankruptcies is entirely justified. After all, they have performed their services on the understanding that they would be paid, and pensions are nothing but “deferred compensation.” Workers are not engaged in the complicated business of risk assessment, as investors are. And unlike investors, they can’t really diversify their portfolios to manage their risk. So it should be unconscionable to tell workers that, sorry, we aren’t paying you what we promised for work you’ve already done. Especially because their pensions, unlike those of corporate chieftains, are far from generous. Most of the retired city employees receiving checks get about $1,600 a month.
This means that much of the burden of bankruptcy will have to fall on those who lent Detroit money, and those who insured those lenders. This is as it should be. They got a return, reflecting their subjective estimate of the risk that they faced. Of course, they would like to get high returns, and somehow not bear the risk. But this is not the way markets work, or should work.
Impoverishing the pensioners won't solve any problems, and will in fact create more problems, for Detroit and Illinois.
-- Elaine Hopkins
Update Aug. 14, 2013: Here's an excellent article from Salon on pension theft.
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