Why Retirees Will Get Hit The Worst From the Detroit Bankruptcy

The big news this week in the business world was that Detroit, the once powerful motor city, finally threw in the towel and announced that the city was officially broke.  Although it is sad to see such a city as Detroit, which used to be one of the wealthiest cities in America, fall to its lowest point in history, what is even more disheartening is all of the baby boomers and retirees that will have their retirement benefits altered due to its downfall.

While most Americans (who don’t live in or around Detroit) are most likely brushing this off and saying things like, “It’s about time Detroit came clean and announced they are broke” or “Didn’t they file bankruptcy years ago?”, there are many thousands of public workers (both working and retired) that are on tooth and nail waiting to see how their pension benefits will be affected.

Some suspect the worst, that their benefits will be sliced and diced down to almost nothing going forward.  Especially since the city realizes that its top-heavy expenses to pensions and entitlement programs caused most of the debt issues for Detroit.  Others suspect they will take a modest cut in pension benefits.  However, there are hardly any that don’t think they will not be affected at all.

Many of the answers will come in the next year or so when it is determined who has the legal authority to negotiate on behalf of the retirees.  The city of Detroit lists about $645 million in unfunded pension liabilities, but Kevyn Orr, Detroit’s state-appointed emergency manager, said the number is closer to $3.5 Billion if “more realistic assumptions” are taken into account.  Other unfunded post-employment liabilities such as retiree healthcare costs, account for $5.7 billion of the city’s outstanding debts.

With a country that is already in debt over their necks, most Americans would be shocked if Washington D.C. tried to do any kind of bailout here.  Unfortunately, Detroit is going to have to figure this one out on their own and make some tough decisions on who they are going to have to say “Too bad, you will never see your money again” to.  Sadly, many retirees will surely be taking a huge brunt of the hits.  And unlike big corporations, municipalities, and agencies who can just “write off” the loss of getting paid from Detroit, retirees don’t have that luxury.

 

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