Despite Detroit And Illinois Pension Deficits, Cities And States Aren't Bad Off Public pensions are at risk in both Illinois and in the city of Detroit. In Illinois Tuesday the legislature passed a pension reform bill cutting benefits for retirees. And, also Tuesday, a federal judge gave Detroit the go ahead to slash is public pension and healthcare benefits. Are these examples models for other states and cities with huge budget problems? Alicia Munnell, director of the Center for Retirement Research at Boston College, told Robert Siegel that, in fact, Detroit's pension benefits were relatively well funded and were not the primary budget problem.

Despite Detroit And Illinois Pension Deficits, Cities And States Aren't Bad Off

  • Download
  • <iframe src="https://www.npr.org/player/embed/248854162/248854164" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

MELISSA BLOCK, HOST:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

ROBERT SIEGEL, HOST:

And I'm Robert Siegel. Pensions of public workers are increasingly under attack. Detroit now has the go ahead to slash pension and health care benefits for city employees. A federal bankruptcy judge ruled yesterday that those benefits are fair game as part of the city's bankruptcy deal.

BLOCK: In Illinois, the legislature has approved a measure to trim pension cost-of-living increases and raise the retirement age of state workers. These moves are being seen as a model for other American cities and states that are financially desperate. So, is it fair to focus on pensions?

SIEGEL: Alicia Munnell is director of the Center for Retirement Research at Boston College. Professor Munnell, welcome back to the program.

ALICIA MUNNELL: Delighted to be here.

SIEGEL: Detroit, evidently, has about $8 billion of unfunded pension obligations. That's a lot of money, but your center ranked cities by how burdensome public pensions are. And I gather Detroit didn't even make the top 50. Is that right?

MUNNELL: That's right. Detroit has a lot of financial problems, but at this point in time, pensions are not one of them. One of the reasons is they took out a bond several years ago and put the proceeds in their pension fund. So their pension fund looks good but the rest of their finances are really a disaster.

SIEGEL: Are public employee pensions typically more generous than pensions in the private sector?

MUNNELL: Absolutely. They generally have defined benefit plans and the total amount that they get in retirement is significantly larger than what private sector people are going to get from their 401(k) plans. But public sector employees also generally have lower wages. And so when you look at the whole compensation package, the two sectors are not very different.

SIEGEL: But is part of the problem here that employment in the private sector has been pretty rough in recent years and perhaps that public sector deal looks too good to a lot of people these days?

MUNNELL: I think there is a real issue of pension envy, that public sector pensions are still payable, generally, even though the funding has gone down and taxpayers won't get what they have to put in, in terms of tax contributions, and yet look at the fact that their 401(k) is probably just what it was five years ago and there's some resentment. But generally, people in the public sector are not rich people. The average pension benefit is about $29,000.

SIEGEL: And if we would try to imagine nationally how big the overhang is, how big the unfunded obligation to public employees is across the country, what might it be?

MUNNELL: No, it's very big. My concern here is this focus on Detroit and also on Illinois, since legislation was passed yesterday, makes it sound like the whole country is like Detroit and Illinois. Whereas in point in fact, they are basket cases. They are the city and state in the most dire straits of any entities in the country. So my concern here is that we don't start thinking that, you know, this is a domino effect that we're going to start seeing big slashes in states across the country and the various cities.

SIEGEL: But your center did rank cities in how big the burden of pension obligations is, and Detroit was number 61. They're a basket case but you would say they're not a basket case nor is the state of Illinois because of their pensions.

MUNNELL: No. I would say that Detroit is not a basket case because of their pensions. My view is that they are too generous and that they allow people to retire too early. But the pensions are not what has driven Detroit over the edge. In Illinois, the underfunding of pensions, I think, is a much bigger problem. The government simply has not put aside the money that it was supposed to year after year and decade after decade. And we're in a situation where there is, you know, something has to give.

SIEGEL: A shortfall of about $100 billion, I gather.

MUNNELL: And so all these numbers are huge, right? So I think just talking in terms of absolute numbers doesn't help. Nationwide, pension expense is about 5 percent of state and local budgets. But, of course, they are much bigger in Illinois - or would be if they paid them.

SIEGEL: Professor Munnell, thank you very much for talking with us once again.

MUNNELL: Delighted.

SIEGEL: That's Alicia Munnell of Boston College, where she is director for the Center of Retirement Research.

Copyright © 2013 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.