Debts Should be Honored, Except When the Money Is Owed to Working People

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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

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January 31st, 2011 5:07 PM

Debts Should be Honored, Except When the Money Is Owed to Working People

This seems to be the lesson that our nation's leaders are trying to pound home to us. According to the New York Times, members of Congress are secretly running around in closets and back alleys working up a law allowing states to declare bankruptcy.

According to the article, a main goal of state bankruptcy is to allow states to default on their pension obligations. This means that states will be able to tell workers, including those already retired, that they are out of luck. Teachers, highway patrol officers and other government employees, some of whom worked decades for the government, will be told that their contracts no longer mean anything. They will not get the pensions that they were expecting.

Depending on the specific circumstances, they may find their pensions cut back 20 percent, 30 percent, perhaps even 50 percent. There would be no guarantees if a state goes into bankruptcy.

There has been a concerted effort to bash public sector employees by either highlighting the few instances where pensions actually are exorbitant or just making things up. Untruths about Goldman Sachs, General Electric or any other major company rarely appear in the media, and are usually quickly corrected when they do. However, exaggerations or outright fabrication are a standard practice for those who report on state and local budgets when it comes to public employees.

The public has been bombarded with stories of public employees retiring with six-figure pensions while still in their early 50s. There may be some instances of such inflated pensions, but that is far from the typical story. If we look to New York State, the hotbed of bloated public budgets, we find that the state's main retirement system pays an average pension of $18,300 a year. For many workers this is their whole retirement income since they were not covered by Social Security.

This is the general story of public pensions. Public sector workers are often better situated than their private sector counterparts, in that they even have pensions. But study after study shows that these workers paid for their pensions with lower wages than their private sector counterparts. It is tragic that so many private sector workers cannot count on a secure retirement, but it won't help them to make workers in the public sector equally insecure.

And, there is the matter of paying debts. State governments are legally obligated to pay retirees the pensions they worked for just like any other debt. It is fascinating to see the interest by many pro-business conservative types in defaulting on this debt.

Many of these same people have been determined to argue that homeowners who are underwater in their mortgages should pay their debts. They certainly have not been offering them any assistance in staying in their homes.

In fact, back in 2005, some of the same crew were busy rewriting the bankruptcy law. They wanted to make it harder for individuals to get out of their debt through bankruptcy. They felt it was so important the people paid their debts to credit card companies and other lenders that they actually applied the law retroactively. People who took out debt under one set of bankruptcy rules suddenly found that Congress had changed the rules after the fact and they would now be subjected to a much harsher set of bankruptcy rules.

Let's see if we can find a pattern here. When families take out a mortgage in the middle of a housing bubble, which may have been misrepresented at the time of sale, the homeowner has an obligation to repay the money to the bank. When people take on credit card debt, they absolutely have an obligation to repay the bank -- even if it means changing the rules after the fact.

However, when the government signs a contract with workers, it doesn't have to pay the workers' pensions if it proves to be inconvenient. Of course, we may also throw in the fact that when the flood of bad mortgage loans issued by the banks threatened to push them into bankruptcy, the Treasury and the Fed give them trillions of dollars of loans at below market interest rates.

There certainly seems to be a pattern here. The story has nothing to do with preferences for the market or government intervention. The picture here is very simple: The rules get changed whenever it is necessary to make sure that money flows upward from ordinary workers to the rich. In 21st century America, upward redistribution seems to be the guiding principle.

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