November 08, 2014
The articles reporting on the cuts to Detroit city workers pensions resulting from its bankruptcy have not generally conveyed the true size of the cuts to readers. The pieces usually note an immediate cut of 4.5 percent to pensions and then point out that the agreement ends the cost of living adjustment to pension.
This latter provision is likely to prove far more important. If the workers’ contracts had provided for full indexation, and we assume that inflation averages 2.0 percent in the years ahead, a worker who lives on their pension for twenty years will see a cumulative cut in benefits of around 15 percent as a result of the ending of the cost of living adjustment (COLA). In the twentieth year their pension will be one-third less than in the current year. If they collect their pension for thirty years their pension will be cut by more than 45 percent as a result of the ending of the COLA.
Their sacrifice will be far larger than that demanded of the executives of Wall Street banks, which were effectively bankrupt during the financial crisis.
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