Detroit’s Pensions

by DARWIN BOND-GRAHAM

Having gorged unsustainably on the public sector of Michigan’s largest city for decades, having left empty schools, libraries, and office buildings like gnawed bones scattered about a massacre, having erased whole city services leaving only a skeletal repressive police force, and still seeking guaranteed returns on their bonds, now Detroit’s creditors, and the remaining large corporations in the Detroit metro region are finally turning to the last source of public wealth left, the city’s pension funds.

Detroit’s creditors hope to force pensioners to give up their meager allowances so that the interest and principle due on their bonds, notes, and paper will provide maximal value. The region’s wealthy corporations want to keep their tax benefits and subsidies; tax increases on Michigan’s wealthy are the only potential source of local funds to keep Detroit afloat. The state’s affluent residents and its wealthy corporations (yes, there are plenty) tell themselves that their fortunes have nothing to do with the black metropolis around which they all orbit, inside which the region’s capital was incubated and accumulated for 100 years by several million workers. The state’s governor and legislature act as if Michigan’s 276 cities and 83 counties existed in isolation, in perfectly sealed silos having sprung mature and endowed with resources from the ether, with no economic dependencies between them. Thus no state bailout for Detroit is coming, no revenue sharing, no tax revenues from the exurbs.

No doubt the bondholders will also experience a loss when the endgame for Detroit finally arrives in federal bankruptcy court. The truth is that the city of Detroit today does simply lack the fiscal base from which to raise the funds necessary to pay its massive debt and its pension obligations while sustaining the desert-scape of municipal services that’s left. The piranha-like feast of the bondholders on the fiscal carcass of Detroit has been insanely unsustainable for over a decade, and most of the lenders realized the riskiness of their loans. Hungry still for every last morsel of social wealth, capital is maneuvering to ensure itself the best spot at the table. Mastication of Detroit’s pension obligations is one of the final rites of the ritual slaughter of a once great city, a hub of global manufacturing, and epicenter of multi-racial working class Americana. Motown is being ground down.

In this clamorous battle between Detroit’s creditors and public employees too many reporters and commentators have made the mistake of calling workers’ pension obligations a “debt” of the city. Pension obligations are not debt in the same way that bonded indebtedness is. True, both debts and pension obligations are relationships, institutions with thousands of years of history, but pensions are profoundly moral obligations between governments and their people. Debts are financial transactions between creditors and borrowers.

From the beginning of the American Republic, debts have been treated as less than sacred. Bankruptcy laws in America are among the most liberal in the world, allowing debtors to discharge these burdens in insolvency and start anew. Debt has always been understood as a potentially usurious and deforming scourge. Pension obligation, in contrast, have become more sacred over time. The opposite of a debt, the pension obligation has been thought of as the product of a virtuous savings that is liberating.

Only in the past few decades have pensions come under withering attack from fiscal conservatives with any success. Populist, radicals, and even liberal elites have succeeded multiple times in American history in attacking the morality of debt. One of the least ambiguous words of collective joy comes to us from the repudiation of debts in the ancient world – jubilee. The repudiation of pension obligations would never be associated with dancing in the streets for obvious reasons.

Partly this is due to the origins of debt and the pension. Debt emerges as a tool of the powerful to finance states and later business enterprises. Credit remains available mostly to monarchs, but some societies see the proliferation of debt among their merchant and artisan classes. Only toward the end of the 20th Century does debt become available to the common “consumer.” The pension emerges in struggle as a concession from the ruling classes to the masses, a required payment lest the subjects rebel and sever the heads of their masters.

Debt and pension obligations are intimately intertwined in one another. Early states developed the cultural mores and legal codes governing debt when emperors and monarchs raised funds for war and colonial expansion. Their warriors, indispensable in expansionary phases of conquest and colonization, and ever-dangerous after victory or defeat, had their allegiance to the king bought in part with a pension. Imperial bureaucratic states later adopted the absolutist king’s pension and applied it to their more impressive armies, but the modern states were seeking the same pre-modern loyalty of the soldiers, active and retired. From the Revolutionary War onward the citizen soldiers of the United States had their allegiance to the republic secured with pensions while the young federal government borrowed from continental Europe the funds needed to beat the British.

The pension is not a debt owed by state to its laborers. It is an obligation of a different quality founded not in a market contract, but in a social contract. Whereas states and empires might rise and fall on their ability to obtain credit and pay debts, far deeper faults threatening the existence of civilizations and cultures will quake and rupture if the moral obligations embodied in pensions are betrayed. To repudiate a debt is to upset a bank or a hedge fund, just a couple dozen men in suites in a few dozen cities who will still know where their next meal is coming from. They will be upset to learn that their profits have been cut. To repudiate a pension obligation is to upset a class, to threaten the lives of a multitude, to send thousands of workers into a struggle for survival.

The contemporary pension system in America grew out of the Great Depression and the New Deal, and it fundamentally transformed capitalism and the state. Massachusetts was the first state to offer a pension to every public employee in 1911, but even by 1923, when most states had enacted pension legislation, most public employees in the US remained uncovered, responsible for their own provisions after the end of their work life. Throughout the 1920s financial and corporate forces fought and undermined the expansion of the pension system, opposing what this naturally would accomplish – a redistribution of income and wealth from the elite to the masses. The success of the owners of capital in preventing the spread of pension obligations beyond a few privileged civil service workers was one of the factors that caused the Great Depression. Without pensions —in addition to low wages, a regressive tax regime, rights to unionize, and lacking other basic social and economic rights— America’s working class majority fell behind and lived on the precipice of disaster while the elite hoarded fortunes previously unimagined. Income and wealth inequality widened and a crisis of over-production broke the system.

In 1929 the fine print of this draconian social contract was enacted when the US economy collapsed in a deflationary spiral. Millions were thrown into poverty, and lacking a social safety net, of which pensions would have counted for a lot, this poverty led to starvation, mass homelessness, and early death for countless working class elders. More than the legitimacy of the US was at stake. The legitimacy of capitalism was questioned.

Labor insurgency during and after the Great Depression was a catalyst for change. Between 1940 and 1970 the number of pension plans, both public and private, grew rapidly in the US. And once again war and empire and the needs of the United States and the monopoly corporations closely tied to the government to obtain legitimacy and obedience led to the extension of social welfare benefits for millions of Americans during and after World War II. The era of pension fund capitalism took off.

Pensions save the wealth produced by labor in vast pools of securities, in effect giving workers claims upon the future dividends and interest generated from corporations, states, and banks. Today most public employees, federal, state, and local, are vested in pensions. Many of these retirement systems are defined benefit, providing an absolute moral commitment of the state to the security of its workers.

Certain segments of capital also found a way to profit from this democratic transformation of the social contract. Pension fund management is a vast industry today. Ironically some of the greatest villains of financial capitalism find themselves beneficiaries of the pension fund boom; private equity investors obtain the balance of their funds from contributions of “limited partners,” the largest of which are public employee pension systems. Corporations today find the the largest shares of of their stock held by pensions as long-term investments, although this trend has been reversed in the last few decades as more volatile privatized retirement schemes like 401k plans and mutual funds replace the defined benefit pension’s indexed stock portfolio as the big force in equities markets.

Regardless of what a few financial companies have gained from the pension revolution, most of the financial and corporate institutions have remained hostile to the social contract embodied in the pension obligation, particularly the public employee pensions over which they can exercise little control. Financial and corporate coalitions in virtually all cities and states seek to dismantle public employee pensions because they require contributions from the employer. In a direct sense the employer is the city, county, or state, but ultimately the employer is the society at large, of which the financial institutions and corporations are a part. Capital benefits from the services of the state, from the infrastructure and services provided by its laborers, but at the same time each corporation and every bank hopes to extract itself from any obligation to support social investments. They want their cake, and to eat it too.

In Michigan dozens of large corporations and banks, many of which are physically located in suburban towns, benefit from the physical and social infrastructure provided by the city of Detroit. But capital continually seeks to avoid paying for these services. The suburbanization of industry and the flight of the affluent workforce from Detroit into surrounding exurbs that the central city was unable to annex was itself a geographic ploy by the better-off to avoid paying for the provision of public goods. Detroit shows us what the logical end point of this neoliberal tendency looks like.

Public employee pensions have been attacked in virtually every city and state since the 1980s. That attack accelerated in the Great Recession as corporate elites and fiscal conservatives regrouped along with neoliberal democrats to plan the next set of “reforms” aimed at public employee pension systems. In most places these reforms will include increased employee contributions that will act as a wage cut by forcing more of the worker’s current income into future savings. This simple reduction of public employee labor costs will consolidate regressive tax systems and tax breaks benefiting affluent communities and corporations. Other reforms will involve scaling back pension benefits for new hires by guaranteeing fewer benefits after longer periods of vesting at higher contribution rates. These tweaks all add up to a slow withdrawal of the moral obligation of the state and capital to sustain the welfare of labor. At its extreme the agenda of the financial and corporate elite will be to completely abolish the pension obligation where they can, and to replace it with a precarious and austere new social contract. In Detroit they are approaching this extreme.

Darwin Bond-Graham, a contributing editor to CounterPunch, is a sociologist and author who lives and works in Oakland, CA. His essay on economic inequality in the “new” California economy appears in the July issue of CounterPunch magazine. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion

 

Darwin Bond-Graham is a sociologist and investigative journalist. He is a contributing editor to Counterpunch. His writing appears in the East Bay Express, Village Voice, LA Weekly and other newspapers. He blogs about the political economy of California at http://darwinbondgraham.wordpress.com/

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