Detroit's lesson — 2016 candidates can't ignore $60 trillion debt: Column

Detroit’s historic bankruptcy should serve as a wake-up call to U.S. politicians who are ignoring a national debt crisis that could eventually threaten the livelihoods of millions of American retirees.

As the Republican presidential candidates hit the Motor City on Thursday for a Fox News debate — and as the two remaining Democratic candidates also campaign there before Tuesday's Michigan primary — it’s critical to understand why Detroit’s financial collapse should be a red flag for America.

Detroit’s remarkable escape from $7 billion in debt finally put the well-being of the city’s 688,000 residents before its 170,000 creditors, as documented in my upcoming book. .

But the city’s debt crisis offers a crucial lesson for presidential candidates on the importance of shoring up the nation’s balance sheet to ensure that, unlike in Detroit, benefits are preserved for American retirees.

For starters, government debt at the local, state and national levels is much higher than you’ve been told.

In Detroit, the city owed only about $1.1 billion in traditional unsecured bonds — but it owed about 10 times more to its retirees through unfunded pension debt, retiree health care obligations and pension bonds.

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By comparison, the national debt — at least the figure you usually hear — is about $19.1 trillion. But that number does not include the true cost of benefits politicians have promised to future retirees.

Let’s read the fine print. It turns out the U.S. government has promised an astounding $41.9 trillion in Social Security, Medicare and other retiree benefits over the next 75 years that it cannot pay for under current revenue projections, according to the U.S. Treasury Department’s Sept. 30, 2014, Statements of Social Insurance.

Taken together, that means the true national debt is $61 trillion.

That’s more than three times U.S. gross domestic product, and it reflects a debt-to-income ratio of about 19-to-1 based on current government revenue. In Detroit, the debt-to-income ratio when it filed for bankruptcy was about 18-to-1.

True, we don't have to pay all of that debt off immediately. But those figures illustrate the mushroom effect of political promises without a true commitment to pay for them.

As a consequence of Detroit's economic collapse and borrowing binge, 32,000 retirees paid the price for unrealistic promises — pension cuts of up to 20% and a stark 90% cut in health care benefits.

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Fortunately, the U.S. has time and the financial wherewithal through its massive tax base — if not the political will — to fix its own debt problem before it’s too late to protect retirees.

To ensure the next president is prepared to address this issue, here are three key questions that Donald Trump, Marco Rubio, Ted Cruz, John Kasich, Hillary Clinton and Bernie Sanders must be prepared to answer:

• How will you fix Social Security: tax increases, benefit cuts, privatization or some mix of the above? Don’t lie to the American people and say doing nothing is an option. If you want to connect with Millennials at the ballot box, it’s time to deliver answers. A 2014 Pew Research study found that 51% of Millennials believe they will receive no Social Security benefits when they retire.
• Is it possible to balance the national budget without dramatic changes to Medicare or tax increases? Trick question. It’s not possible. Expenditures on Social Security, Medicare and other health and employment programs represented 60% of the federal government's 2015 spending, according to the National Priorities Project.

But this is a litmus test for whether a politician is willing to tell the truth to the American people. Some form of tax increases, benefit cuts or a total overhaul of the American health care system is required.

Choose a path, but don't ignore the harsh reality. Medicare Part B alone accounts for $17.9 trillion in unfunded promises, nearly equal to the traditional national debt, according to the Treasury figures.

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“If current policy is maintained,” there will be “enormous sacrifices from future taxpayers,” University of California-San Diego economist James Hamilton concluded in a 2013 study for the National Bureau of Economic Research.

• Does a global debt binge pose a threat to our economic security? If the answer is no, how do we explain the near collapse of Greece, the debt crisis in Puerto Rico, bulging liabilities in China — and the corresponding economic troubles there?

A 2015 McKinsey study found that from the end of 2007 through the end of 2014, global debt grew by $57 trillion, as the rate of new governmental debt added annually increased by 60% to 9.3% of GDP.

The good news in Detroit is that the city is moving in the opposite direction. After a bipartisan bankruptcy settlement dubbed the “grand bargain” — which won the approval of Republicans and Democrats in the state legislature, as well as Wall Street lenders and retirees — the city’s budget is balanced. That’s a remarkable achievement for a city that had been bleeding cash for decades.

More important, the mayor and City Council are working together to invest in public safety, turn the street lights back on and tear down abandoned homes, using cash flow that was previously diverted to creditors.

Detroit has a second chance at life, but it came in part at the expense of its vulnerable pensioners.

Thankfully, it’s not too late to protect American retirees. But it’s long past time for a more serious national conversation about the policies necessary to shore up the social safety net.

Nathan Bomey is a business reporter for USA TODAY and author of the forthcoming Detroit Resurrected: To Bankruptcy and Back. You can follow him on Twitter @NathanBomey or email him at nbomey@usatoday.com.  

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