If a Town Can Go Bankrupt, Why Can’t the U.S.?

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Brian Snyder / Reuters

A "For Sale" sign is seen outside the boarded up entrance to the Central Falls Department of Parks and Recreation in Central Falls, Rhode Island August 1, 2011.

On the heels of a federal debt deal that no one really wants comes news that tiny Central Falls, R.I., (population: 18,716) has landed in bankruptcy court. City fathers cannot pay retirement benefits promised to municipal retirees, most notably former firefighters and police officers. So the city is going to court to take back what it had promised.

If only this was an isolated case. Last year, city officials in Prichard, Ala., (population: 27,578) stopped paying 150 retired town employees the benefits they once thought were secure. Pensioners in Prichard are going back to work, if able. Some cannot afford electricity and running water.

The New York Times reports that three other cities in Rhode Island expect to reduce pension checks and that a handful of other local taxing authorities are either in bankruptcy (Vallejo, Calif.) or expect to file for bankruptcy (Jefferson County, Ala.) in the near future.

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One by one, communities are going broke and leaving public pensioners in the lurch. This is but the tip of the iceberg. Barring a miracle turnaround, others will fail in similar fashion.

Which brings me back to the debt deal that no one wants. The deal funds the federal government through the next election. But it may not be enough to save the U.S.’s triple-A credit rating, long a top priority of policymakers. We should take that as a clear sign (as if we really needed one) that the federal government may be going down the same road as Central Falls, Prichard and possibly many other municipalities.

Washington has made unrealistic promises in the form of Social Security and Medicare benefits and pension plans for federal employees. Cuts are coming. Stocks of nursing home, pharmaceutical and other healthcare companies have been hit hard in the wake of the deal because it almost certainly will mean reduced payments from Medicare to certain providers. Federal workers are bracing for layoffs; federal retirees fear reduced benefits.

There are many lessons here. The obvious one is that a country or town can run out of money just as surely as an individual can. Who can we tax to fix this mess? There aren’t enough rich to do the job. Everyone will have to pay.

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As an individual, you can’t do much about the way politicians mismanage our collective affairs. But you can — you must — limit the potential impact on your retirement plan.

One of most important themes of the past decade has been this: You’re on your own, baby! Indeed, that was the TIME cover line in January 2002. Most folks now understand that defined-contribution plans have come to replace defined-benefit plans. It is perhaps the most far-reaching development in personal financial planning in many decades and represents a seismic shift away from the era of social safety nets.

What is new and shocking to many, though, is the vulnerability of our governmental bodies. They’ve reached the breaking point. They are unable to borrow enough or tax enough to make good on all their promises.

The Great Reset continues. The debt deal is but a patch. Look for the economy to remain sluggish in the near term, at best, and for more government guarantees to go begging. For those who are working, saving more is your best option. Your kids should start saving in earnest as soon as they have a paycheck. Retirees should secure an income stream, possibly through an immediate fixed annuity, as soon as possible.

Eventually the economy will snap to. But even then retirement benefits are likely to look a whole lot different. Social Security and Medicare aren’t going away. But as more retirees are finding out, all you really have is what you have.