Detroit bankruptcy ruling: What it may mean for your pension

Municipal workers and pensioners are on edge in Detroit after a federal judge ruled that the Motor City can cut pensions, clearing the way for the city to enter bankruptcy
Municipal workers and pensioners are on edge ... 02:43

Debt-burdened cities around the country are studying a major court decision. A federal judge in Michigan ruled on Tuesday that Detroit can cut public pensions as it enters bankruptcy.

The milestone ruling could affect the retirement of millions of current and former municipal workers. In Detroit, they are among 100,000 creditors owed money. The city's debt stands at $18 billion.

CBS News senior business correspondent Anthony Mason explained on "CBS This Morning," "(The ruling's significance) is that union workers across the U.S. are getting the message that, even if the constitutions in the state, which Michigan does, supposedly protects your pension, if the city files Chapter 9, federal law supersedes that, and everything is now on the table. Basically what the judge said here is Detroit is in deep trouble, everything has got to be looked at."

Appeals are likely, Mason said, and may even go all the way to the Supreme Court. For now, however, the city can move ahead with a plan for bankruptcy, expected in January. It will likely include some cuts to pensions.

So how did it all get this bad for Detroit?

"The emergency manager of the city, Kevyn Orr, says we've been marching our way here for 60 years. I think that's true," Mason said, adding the population decline of the once fourth-largest city in the U.S. -- by some 63 percent -- is also a factor because the tax base has eroded.

The city just didn't have the money, and it was mismanaged, which is how in part it ended up in its current crisis.

The impact of this decision may go far beyond the Motor City. Though no government of any size wants to declare bankruptcy, the noose has been tightening on cities and states for decades.

"(In the) recession, the banks they pulled (the noose) tight," Mason said. "A pension plan is supposed to be 80 percent funded. There are 34 states in this country that are under that barometer, only one state -- Wisconsin -- has a fully funded pension plan. Pew calculated the numbers, (and) they said we are $1.3 trillion short in states of what we need for pension funds.

"This is something we've had to confront for a long time and we're finally hit with it," Mason continued. "But the truth is, states can't pay this bill and they're going have to do something about it. They're starting to. Illinois just yesterday passed legislation. They're $100 billion in the hole. … Basically what has to happen is workers have to contribute more, the states have to contribute more and benefits have to be cut. That process is beginning, but it's going take a while."