Should Detroit's pension problems be a warning to the UK?

Stars and stripes The bankruptcy of the city of Detroit is a scandal that has been largely caused by its huge pension debts, but every time I read about it I can't help but draw comparisons with the UK public sector pension scheme.

There will be lots of people that disagree with me and of course it's not directly comparable. Detroit filed for bankruptcy last month after realising that it could no longer shoulder its debt.

The Motor City, famed for its auto industry, had a population of 1.8 million and the highest per capita income in the US, but it has been reduced to a population of just 700,000 left in a decaying city.

The problem for Detroit was its $3.5 billion of pension obligations, mostly private sector in the form of the city's General Retirement System and its Fire Retirement System. It then owed a further $1.6 billion to the bank for providing a buffer for other pension obligations.

The problem has got so great that the city's talks with the unions have broken down as the former does not have enough money to offer the latter even a half decent deal on their members' pensions.
Surprise, surprise the pension is defined benefit, not defined contribution. As people lived longer, benefits increased, costs increased but there were fewer people in Detroit paying in – sound familiar?
Our own public sector pension problem is not anywhere near the level of that faced by Detroit but we should see it is a warning from the future. Figures from pension expert Michael Johnson show that the cost of public sector pensions is set to rise 77-fold over the next 11 years to £15.4 billion, this eye-watering sum should be enough to concern anyone.

Add to that the fact that we are living longer, fewer people are paying into the defined benefit public sector pension scheme and you have what is tantamount to a huge Ponzi scheme, and we all know what eventually happens to Ponzi schemes – they blow up.

When the government is shelling out more money to retired public servants than it is bringing in, there will be something that has to give. The government has already planned some cuts to public sector pensions but I believe it will have to go further to reduce benefits or extend working lives.
If it doesn't then the prospect of a Detroit-style meltdown may become a reality.

The famous faces of bankruptcy

The famous faces of bankruptcy