The Middle Class Dies Twice in Detroit

Detroit didn’t die when it filed for bankruptcy — but the city isn’t the only symbol of 20th century middle-class prosperity the bankruptcy threatens. Defined benefit pension plans in general are endangered by this move, and Social Security itself is the ultimate target.

Cass Technical High School
Cass Technical High School used to educate Detroit’s middle class. Now it’s abandoned.

Detroit, of course, was once a thriving city of over 2,000,000 people, many of whom comfortably supported families by working jobs in clean, safe factories with little more than a high school diploma. A livable retirement was guaranteed by a generous pension.

But as the middle of the 20th century turned into the end of the 20th century, the U.S. economy changed. The industrial production that had supported vibrant middle classes like Detroit’s headed overseas, and America’s economy — and wealth — flowed increasingly through the financial services sector.

Growth of the Financial Services Sector
The financial services sector grew rapidly at the end of the 20th century.

Although once-mighty blue-collar powerhouses like New York, Chicago, and San Francisco also suffered from the turn of the economic screw, they were able to revitalize by grabbing a slice of the new economic pie. Detroit’s interface with this new economy was less salutary: “ill-considered debt schemes and manipulation by big international banks exacerbated the problem” in Detroit. The problem today is that with essentially its entire middle class relocated to the suburbs, white and black alike, Detroit is now a city of people who produce little tax revenue but make heavy use of government services. It’s not a great financial model for any government.

Detroit doesn’t even export wise-cracking, sweet-smart detectives to Hollywood anymore.

Given its role in the 20th century, Detroit’s bankruptcy this month is a symbolic nail in the coffin of that old middle-class dream. But the bankruptcy actually has much more than symbolic ramifications for us today.

That’s because Detroit’s bankruptcy is, at its core, basically a scam to defraud retirees of their pensions. Along with its declining ability to operate schools, fire houses, and police stations, Detroit no longer has the ability to pay the pensions it owes its retired public employees — employees who often accepted lower salaries, worked nights and weekends, and/or put themselves in danger with the promise of a guaranteed retirement.

Michigan’s constitution has strong protections for these pensions, but if the city is in bankruptcy, the unelected emergency manager who has taken authority there would no longer need public workers’ unions to sign off on a plan to renege on those pensions.

And pensions, specifically defined benefit pensions, are one of the great symbols of mid-20th century middle-class prosperity — just like Detroit is.

Pensions diappearing
Defined benefit pensions have become a much smaller part of America’s middle-class landscape.

Some corporate types, like Michigan Governor Rick Snyder (formerly of PricewaterhouseCoopers) and the unelected emergency manager he appointed, hate defined benefit pensions. They’re not very flexible: once you make people promises about their retirement, they get pissed when you yank the rug out from under them. They’re also not as useful to the financial services titans who now run the economy as 401(k) plans: pension funds can be powerful activist shareholders, and 401(k) investors primarily dump their money in mutual funds for the titans to do with as they see fit.

If the Detroit bankruptcy succeeds at lifting anyone’s obligation to keep pension promises, that could spell trouble for workers in other parts of the country, too, as likeminded corporate governors and legislators try to replicate Michigan’s approach.

Growth in Income Inequality
U.S. income inequality has exploded.

But there’s a more progressive way to solve the “pension crisis that’s eating the state budget alive,” as one business-oriented writer in Illinois put it — raise taxes on the rich. In a country with an exploding income gap between rich and poor, where 4 out of 5 people struggle with joblessness, poverty, or reliance on welfare, this model could be one piece of the puzzle that restores a modicum of middle-class security and reduces income inequality.

The progressive solution is unlikely to come out of Detroit’s bankruptcy, but it could actually start with the fights over the nation’s biggest defined benefit pension plan: Social Security. Republicans would love to privatize Social Security as a cover for making huge cuts, but Social Security can be saved — and even expanded — by raising the cap on earnings eligible for FICA taxes so that wealthier people pay a higher effective rate.

Expanding Social Security may not return Detroit to its heyday, but it’s not too late to save to save this important piece of mid-20th century middle-class prosperity.

Update: This post has been updated to correct the name of Cass Technical High School. Thanks to the helpful reader for the tip!