The Other McCain

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Pensions, Bankruptcy . . . and Racism?

Posted on | December 23, 2010 | 13 Comments

Instapundit links to a New York Times story about the failure of the pension plan for municipal workers in Pritchard, Alabama.

One thing that intrigued me about the story is something New York Times reporters Michael Cooper and Mary Williams Walsh barely brushed up against, the elephant in the room, race:

The situation in Prichard is extremely unusual — the city has sought bankruptcy protection twice — but it proves that the unthinkable can, in fact, sometimes happen. . . .
Driving down Wilson Avenue here — a bleak stretch of shuttered storefronts, with pawn shops and beauty parlors that operate behind barred windows and signs warning of guard dogs — it is hard to see vestiges of the Prichard that was a boom town until the 1960s. The city once had thriving department stores, two theaters and even a zoo. . . .
The city’s rapid decline began in the 1970s. The growth of other suburbs, white flight and then middle-class flight all took their tolls, and the city’s population shrank by 40 percent to about 27,000 today, from its peak of 45,000. As people left, the city’s tax base dwindled. . . .
Prichard’s pension plan was established by state law during the good times, in 1956, to supplement Social Security. By the standard of other public pension plans. . . it is not especially rich. . . . But the plan allowed workers to retire young, in their 50s. And its benefits were sweetened over time by the state legislature, which did not pay for the added benefits. . . .
The city had already taken the unusual step of reducing pension benefits by 8.5 percent for current retirees, after it declared bankruptcy in 1999, yielding to years of dwindling money, mismanagement and corruption. (A previous mayor was removed from office and found guilty of neglect of duty.) The city paid off its last creditors from the bankruptcy in 2007. But its current mayor, Ronald K. Davis, never complied with an order from the bankruptcy court to begin paying $16.5 million into the pension fund to reduce its shortfall. . . .
Workers paid 5.5 percent of their salaries into the pension fund, and the city paid 10.5 percent. But the fund paid out more money than it took in, and by September 2009 there was no longer enough left in the fund to send out the $150,000 worth of monthly checks owed to the retirees. The city stopped paying its pensions. And no one stepped in to enforce the law.
The retirees . . . sued. The city tried to block their suit by declaring bankruptcy, but a judge denied the request. The city is appealing.

You probably don’t see much of a racial angle there, except for the single reference to “white flight.” It’s not until you look at the photos by Meggan Haller that the situation comes into clearer focus. Here is a group of retirees who showed up at a recent city council meeting to ask for some payment for Christmas:

And here is the Prichard city council:

The current municipal government is all-black. The population of Prichard is 84% black. And many (but not all) of the retirees are white.

Does that have something to do with the seeming indifference of the city council to its pension obligations? Perhaps this is irrelevant, but I have a hard time imagining that the New York Times would ignore such a factor if an all-white city government in an 84-percent white town were cheating its black pensioners.

For how many years — decades, even — did Pritchard pay pension benefits (“sweetened” by the state legislature) to these retirees, who could retire in their 50s? For that matter, how many of the white retirees actually live in Prichard? Maybe liberals could justify screwing a bunch of old honkies out of their pensions as “social justice.”

All questions of race and social justice aside, what this story really shows is the folly of “defined benefit” programs in contrast to “defined contribution” programs.

Employees are far better off with a 401(k) plan where the employer matches the employee’s contribution up to a certain amount — a maximum of $500 a month or whatever. This encourages employees to save for their own retirement, and relieves the employer of actuarial worries about obligations for future benefits.

Such a “defined contribution” retirement account is portable and its owner is the same as its beneficiary — i.e., the employee. If he changes jobs, he just transfers the account to the new job. And he can cash out any time he wants (although he’ll pay a tax penalty if he cashes out early).

For some reason, however, governments everywhere have locked themselves into “defined benefit” pension plans. The tragedy in Prichard illustrates the flawed economic thinking behind such plans — and Social Security is also a “defined benefit” plan. 

Prichard may become even more relevant in a few years. Given current demographic trends in the U.S., how long until the majority of young workers (who are also young taxpayers and young voters) are non-white? And at what point will they notice that the FICA and Medicare deductions from their paychecks are going to support predominantly white retirees?

Could that provide the impetus for Social Security reform? Maybe. When a future Congress passes the Die Poor, Old Honkies Act of 2029, surely it will be hailed as “social justice.”

UPDATE: Welcome, Instapundit readers — although I didn’t exactly “charge racism.” Rather, I pointed out a potential racial element to this situation that the New York Times didn’t examine too closely.


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