Detroit Autopsy – Defined Benefits, Union Paybacks

Back in the 1980s I was CFO for a family-owned chain of lumber yards and home centers.  The company had grown to about 300 employees, and was making the transition from a small, easy-going operation to a more fast-paced, modern corporation.

Like most companies of that age and size, mine provided its employees a defined-benefit pension plan.  A defined-benefit plan is one in which employees are guaranteed a specific monthly check at retirement.

There were several problems inherent in these defined benefit plans.  The amount received by the employee after decades of service was actually pretty minimal.   The insurance companies who ran the plans quietly took a huge slice of the pie for their participation, and paid minimal interest on the funds they held.  If an employee changed jobs before he was fully “vested”, he lost most, if not all, of his pension.  And many of these plans were “overfunded”, meaning the company had paid more money into the plan than the employees would ever be able to receive – this cash should be used by the company for some purpose other than making the insurance company richer.

We made the decision to terminate our defined pension plan and convert to a new 401(k) defined contribution plan, which had just been authorized by Congress.  Employees were encouraged to save some money, tax deferred, from every check, and the company generously matched the employee’s contribution.  Employees chose how they wanted to invest their savings, and in no time we all had considerable accounts to look forward to in retirement, which we could take with us if we changed jobs.

The difference between “defined benefit”, which promises security but not prosperity, and “defined contribution”, which offers rewards based on saving and investing, is the difference between “communism” and “capitalism”.

And it is what killed Detroit.  It will kill more cities and states, and perhaps our nation, if we don’t learn this difference and take action now.

Our government union employees are about the only workers left in our country who are promised a guaranteed, and in most cases very lucrative, income at retirement.  Virtually no businesses operate this way.  Our government officials have promised their union employees a great deal more money than they can extract from the taxpayers.  The result is economic disaster.

Maelstrom_of_MoneyHow did this happen?  Simple.  Elected officials control the compensation paid to their union employees as well as the revenues extracted from taxpayers.  Union employees promise to help (with cash and labor) elect the politician.  When elected, the politician pays the union back with higher compensation, using money that is extracted from the taxpayers.  It goes around and around until the government is broke.

We must guard against government growth with every breath.  The framers of our constitution were trying to create a system that would not be subject to the corruption that has eventually destroyed every government in history.   Government must be restricted to only strictly necessary spending, according to the constitution, and let the miracle of free-market economics build our wealth and improve the standard of living for all.

The only way out is to elect officials who will eliminate government employee unions, and stop the unholy cycle of pay-backs. Government employees should be compensated fairly based on actual performance, and compete for their jobs, just as employees in the private sector do.

Before you vote for any elected official, ask him or her for a statement of position on government employee unions.

Tom Balek – Rockin’ On the Right Side

Rockin' On the Right Side

Too many people need me
I’ve got so much, so much to do
But when my traveling is over
I’ll pay you back with interest
I’ll pay you back with interest

6 thoughts on “Detroit Autopsy – Defined Benefits, Union Paybacks

  1. I am a retired government employee with a small pension. The system is a fraud and is financed with the fantasy that the trust will earn 7.75 per cent. I am spending the contributions today’s employees pay in. The game is over. The next generation is screwed and I hate it.

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  3. Great post, Tom!
    I have a question! Do you think that Detroit can be saved at this point if they cut back (drastically) on Union Pensions? Also, do you think that there were other contributing factors or that this was simply the main one?

    I come from Arizona (a right to work state) so I am not as familiar with the Union world as I should be.

    • I contend that all government employee unions must be eliminated. It is immoral to get oneself elected by providing paybacks to constituencies who fund the campaign. Our governments at every level have become terribly corrupt and this would be a major start.

      Can Detroit come back? Sure, but only if it is totally reorganized. Most of the city would have to be bulldozed, leaving the core (mainly newer downtown) area to remain intact as Detroit. The difficult part is how to break up the Democrat control constitutionally, and how to deal with the largely helpless and illiterate citizens who remain there. We would have to make them ready and able to work, which could only be done by an intensive (maybe one-year) job training and education rehab program with a “cutoff” date on their welfare and benefits established.

      I would like to see a coalition of private developers come in and take over, in a partnership with the state government. That would have to be a new economic development zone outside the dominion and control of the current city; a new city, if you will, that is geared to attract businesses by significant tax advantages and fast-track, cooperative development. I’m sure there would be great international interest in building a new high-tech manufacturing center. There are large, well-run corporations outside our borders that would love to have access to the North American market, if the economic conditions are right and our labor base is trained up and ready to go.

      It won’t be cheap, but the area could be rebuilt pretty quickly, if private enterprise is allowed to drive the revival instead of corrupt government entities. China has been doing this for years – not without problems, but they have had some successes. Problem there has been it is still government-controlled, rather than driven by private enterprise.

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    • A fact unreported by our local newspaper is that the Helena School District is now in the situation of spending NINETY-ONE PERCENT OF ITS GENERAL FUND ON SALARIES. Our teachers are the highest paid in the state with a whopping $75,000.00 a year at the top. Your are right- the union gets the school board members elected and they continue to increase the unions take from the district which is a percentage of salaries. Meanwhile our district is falling apart- we are unable to adequately fund maintenance or operations of the district. How can the unions possibly think this is the best for the children?? Education Lady

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