"They (worker in Chile) trust the private sector and prefer market risk to political risk. If you invest money in the market, it could go up or down. Over a 40-year period, though, a diversified portfolio will have very low risk and provide a positive rate of real return. But when the government runs the pension system, it can slash benefits at any time."
- Jose Pinera, Harvard PhD

Detroit is bankrupt.   Promised government pensions will surely be reduced.  Nearly all Americans lament the debacle in Detroit and fear the status of government pensions in San Bernardino, Stockton, Chicago, the state of Illinois and other big cities and states in America.   Most of those commenting are calling for better foresight by politicians, improved oversight by union leaders and more compromises between government unions and the government to prevent bankruptcies.   

The most complete analysis of these bankrupt pensions is by Gretchen Morgenson of The New York Times.  Municipal and state pensions are enormously under-funded.  Universally, the problem is the dishonest financial statements of these cities and states.  Besides the pensioners being mislead by government officials and union leaders, municipal bond holders have been dishonestly deceived. 

Last year, the Security and Exchange Commission accused the state of Illinois of misleading investors regarding the magnitude of unfunded pensions.  Between 2005 and 2009, Illinois sold $ 2.2 billion in bonds.  Illinois eventually settled with the Securities and Exchange Commission (SEC).  Importantly, the SEC is keenly concerned with the magnitude of misleading municipal and state financial disclosures throughout America.

“Our office expects to take a good hard look at pension disclosure issues,” an official said. “It is a major concern because of the magnitude of unfunded municipal pension liabilities and the size and opaqueness of the investment portfolios.”    

Rather than being being politically correct, the SEC official probably should have said,  “...the magnitude of unfunded municipal pension liabilities and the dishonest statements on the size of the state's and city's debts.”

Wake up Americans!  Government cannot be trusted – city, state and federal!  There are six critical, inherent failures of our government, which are controlled by our popularly elected politicians. 

• First, our elected officials always cater and pander to the voting constituents.  Thus, governments stick the financial burden on future workers.  Social Security, Medicare, and now ObamaCare are prime examples at the federal level.  The same is true for pensions; city and state.
• Second, is corruption.   All politicians want to be re-elected.  Besides pleasing constituents at the expense of future workers, politicians seek coalitions.  In the case of municipal and state employees, most governments take money directly from the employees check, then send the money to union leaders and, in-return, unions finance elections...generally sponsoring Democrats.  Then, the elected officials decide on the pension benefits and salaries of the government workers.  Needless-to-say, this process is always prone to subtle and direct corruption.
• Third is obfuscation.  Politicians and bureaucrats habitually obscure government functions and results.  The politician’s speech is seldom precise or logically reasoned. Seeking a favorable image, the politician talks in generalities, exaggerates and obfuscates.  Presently, Obamacare and the HealthCare.gov debacle are an expensive and poignant example of secrecy, incompetence and obfuscation.
• Fourth is knowledge.  Elected politicians receive almost all - at least 90 percent - of their information on the efficacy of a program from the bureaucracy.  Again, think of Senator Baucus the architect of ObamaCare fearing an enrollment “train wreck.”  Baucus begged and pleaded for information and progress reports from Secretary Sebelius and was assured that everything was okay.  Instead of a “train wreck,” the bureaucracy's gross incompetence has become a series of exploding bunker-busting bombs.
• Fifth is lack of institutional knowledge and oversight.  In our popularly elected governments, politicians make decisions, then bureaucrats have operational control.  Over the course of years, many politicians retire and are replaced.  There is little institutional knowledge.  Worse is the lack of consistent oversight, if any.
• Sixth is accountability.  Government programs seldom hold anyone accountable.  Who, if anyone, will the pensioners of Detroit seek restitution.  Former elected officials, union leaders, auditors, or bureaucrats?  Good luck!  As Thomas Sowell has written: 

It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.

The corruption and debacle in Detroit as well as other
American cities and states' bankruptcies, almost everyone commentating on the subject wants a government solution – more oversight, more transparency, etc.   It's insane.  Political cancer continues to overwhelm and debilitate our governance systems.  Social Security, Medicare and now ObamaCare, at the federal level, are bankrupt Ponzi schemes being abused by politicians since their inceptions.  Regardless of the composition of ethnic, education and political make up of cities and states in America, most have unfunded pensions because of the six mentioned flaws of governance.  

Compromise, legislation and bankruptcy courts will eventually deal with state and local pensions, and there will be horrific disruptions for the impacted pensioners and bondholders.  Because of major financial disruptions, every American will be indirectly impacted.  Undoubtedly, there will be calls for new and more taxes.  There is already talk of a tax on wealth.  Sadly, increased taxes will stunt economic growth and cause our wealth to move to other jurisdictions within and outside the United States.

Going forward, personal retirement accounts owned by the recipient is the most-viable solution to government's misuse of other peoples money.  Chile is still the prime example of how workers' can own their accounts. 

In 1980,  Jose Pinera, a Harvard PhD in economics, transferred Chile's Social Security Ponzi scheme into accounts owned by the country's workers.  Through the years, it has proven to be tremendously successful.    Most importantly, neither a socialist-leaning government nor right-of-center government have taken a single dime from the account holders in Chile. 

As Dr. Pinera writes: 

"They (worker in Chile) trust the private sector and prefer market risk to political risk. If you invest money in the market, it could go up or down. Over a 40-year period, though, a diversified portfolio will have very low risk and provide a positive rate of real return. But when the government runs the pension system, it can slash benefits at any time."