Despite having the protection of public pensions etched into the Michigan Constitution, it is retirees who, by far, are the ones bearing the financial burden of Detroit’s bankruptcy. This unprecedented hit is being taken by retirees who believed that, after working throughout their lives, they would be secure in their old age.
The real story of Detroit’s bankruptcy is the unprecedented hit retirees are taking.
If the plan of adjustment is approved by Judge Rhodes, about $7 billion in liabilities will be trimmed in bankruptcy, according to the most recent news accounts. Of that $7 billion, it appears as if nearly 80 percent is being taken from retirees.
The biggest hit comes in the form of health care cuts, which have already been instituted as a result of actions taken by Orr. Instead of being enrolled in health insurance plans where they pay 20 percent of the cost and the city picks up the rest, the vast majority of retirees are now receiving $125 monthly stipends (some, such as police and firefighters injured on the job, receive as much as $400.) That reduction is the single largest “debt” the city will be shedding – about $4 billion. As a result, retirees have seen their insurance costs skyrocket.
On top of the health care cuts, general retirees, whose pensions average around $19,000 a year, will also suffer a 4.5 percent reduction in their pensions. Police and firefighters, because they aren’t eligible for Social Security, will see no cuts to their current pensions. Both groups, however, will be hit hard by reductions to annual cost of living (COLA) increases. Though this fact tends to receive little coverage in the media, the consequence is significant. According to a report produced by Kim Nicholl, an actuary who advised the Retirees’ Committee appointed by Judge Rhodes, the COLA cuts will reduce future payments to general retirees by about $616 million, and to police and firefighters by some $688 million, for a total of more than $1.3 billion.
Finally, there’s the recoupment of alleged interest overpayments into annuity savings accounts that many city workers contributed to as part of their retirement planning. That so-called “claw back” will take more than $190 million from retirees who participated in the program from 2003 to 2013. The money will be deducted from future pension payments.