Detroit’s pension reform: Bold, inevitable cuts for retirees by Lauren Silva Laughlin @FortuneMagazine June 19, 2014, 11:33 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons On Wednesday, Detroit Emergency Manager Kevyn Orr outlined a major pension reform, made in conjunction with labor partners, that includes cuts to current and future retirement benefits for the city’s public employees starting July 1. The proposal requires a judge’s approval. But if implemented, it would be an instructive lesson for staunch defenders of public pensions. The city’s advisor is proposing big changes. Current retirees would see pensions cut by 4.5%; future pensioners as much as a 20% reduction. Workers will be contributing up to 6% of their pay to the pension pot; formerly, they gave nothing. (Other perks are being taken away too, like pension benefits based on unused sick leave and overtime). The old guidelines were a gift in the first place. Sure, public employees should receive more from taxpayers because of their civil service. But private employees have seen their company contribution plans evaporate over the past decade. Meanwhile, local governments have protected workers carte blanche, making the comparison between public and private benefits resemble an elephant to a pea. This has caused big problems for some governments. New Jersey is in the process of debating future plan changes. Illinois recently put through sweeping reforms that are being tested. It’s no secret the federal government will have major problems funding social security in the not-too-distant future. If approved, this restructuring would offer a dramatically different outcome than recent bankruptcy tests. When the Obama administration backed a sale of Chrysler to Fiat in 2009, for example, the United Auto Workers pension leap-frogged private creditors in an unprecedented bankruptcy that went to the Supreme Court. (It declined to hear the case.) There, the bankruptcy favored the union before senior, private creditors, reinforcing that pensions are protected above all else. Here, pensioners could take a hit. At the same, Detroit’s moves may not open the door for other municipalities to restructure their pensions. Detroit is bankrupt, first off. State laws come with unique nuances too, and there is some indication that Michigan’s may be slightly less accommodating to employees. Still, the gesture is significant. Public pension burdens are a zero-sum game. If obligations are increasing more than municipal revenues or investment returns, one of two things has to happen: current employees need to contribute more, or retirees need to accept less. Previous cases have backed pensioners who would rather test bankruptcy than adhere to this math. This deal shows sacrifices are inevitable.