Essay: Resolving the Public Pension 'Crisis'

Abstract

The high profile bankruptcy filing by the City of Detroit, Michigan, has brought to the fore the relationship between pension underfunding and the financial difficulties faced by an increasing number of municipalities and states in the United States. The problem is likely to continue to grow with more municipalities finding it necessary to explore the bankruptcy option or otherwise attempt to reduce pension and other obligations to employees and retirees. This essay is an effort to provoke discussion of the normative issues surrounding pension reform, mainly concerning how public employees and retirees should be treated in municipal bankruptcy. Should pension claimants be treated like any other unsecured creditor, or any other person who suffers when the regulatory background is altered, or is there a case for treating them as victims of a fiscal disaster beyond their control? Is pension reform just one more step in the evolution of the labor market that has made it much more difficult for lower skilled workers to achieve a middle class lifestyle? If so, how should the law react? The essay also includes some discussion of the fascinating federalism issues raised by the potential clash between state law protecting pension rights and federal bankruptcy standards. Should a federal bankruptcy court respect the decision of a state court, that the use of federal bankruptcy to reduce pension obligations would violate state constitutional protection of pension rights? This may be the most interesting federalism dispute in decades.

Keywords: public pensions, municipal bankruptcy, pension reform

JEL Classification: H55, K31