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US cities facing issues over pension packages

Andy Uhler Apr 7, 2016
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People, mostly union and retired city workers, protest in front of the U.S. Courthouse during the beginning of Detroit's bankruptcy eligibility trial back in 2013. 
Bill Pugliano/Getty Images

A task force aimed at preventing Philadelphia from going bankrupt has urged the city’s mayor to figure out how to deal with its almost $6 billion pension deficit. Philadelphia hasn’t been or isn’t the only region in the country dealing with this issue, though. 

Detroit was the poster child of cities running out of money. In 2013, the city filed for bankruptcy after accumulating $18 billion of debt. The pension program was said to account for a sixth of that total.

Many cities and states have established generous pension packages, and now they can’t afford to keep the promise. 

“The pensions that run into problems are the defined benefit pensions where it’s entirely up to the employer, the city or the state to put the money into the account and save the money,” said Leora Friedberg, an associate professor of economics at the University of Virginia.

She said what’s happening in cities like Philadelphia is the accumulation of many bad decisions. Cities and states are going to have to move to 401(k)s — packages where the money is saved in an account over time.

Pete Constant, the director of the Pension Integrity Program for the Reason Foundation, said that these decisions were made generations ago.

“We have to look at retirement and see what retirement means today,” Constant said. “We can’t continue to take the debt from today’s workers and transfer it onto future generations.”

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