Detroit declared bankruptcy in 2013, unable to pay both its retired workers and provide basic city services. Half the streetlights didn't work, police response times stretched to an hour, and yet the city owed $3.5 billion in pension promises. This wasn't mismanagement—it was mathematics catching up with politics.

Across the developed world, governments face a similar reckoning. They promised generous retirement benefits when workers were plentiful and retirees few. Now those promises are coming due just as populations age and growth slows. The result? A fiscal time bomb that forces impossible choices between honoring past commitments and funding current needs.

Government pensions began as a reasonable bargain. In the 1950s and 60s, public sector workers accepted lower salaries than private sector counterparts in exchange for job security and generous retirement benefits. Politicians loved this arrangement—pension costs wouldn't hit budgets for decades, while wage restraint helped immediately. With baby boomers entering the workforce and life expectancy around 70, promising full benefits at 60 seemed sustainable.

But politicians discovered a fatal flaw in democracy: you can win elections by promising future benefits without raising current taxes. Each generation of leaders sweetened the deal—earlier retirement ages, higher benefit formulas, cost-of-living adjustments. California prison guards can retire at 50 with 90% of their salary. Illinois teachers contributed 9% of pay but receive benefits worth 75% of final salary until death.

These promises happened through collective bargaining and legislative votes, often with little public attention. Unlike private companies that must fund pensions according to strict rules, governments operated on pay-as-you-go systems—using current tax revenues to pay current retirees. This worked when three workers supported each retiree. It breaks when that ratio approaches one-to-one.

Small funding gaps become catastrophic through the brutal math of compound interest working in reverse. Consider a typical scenario: a government should contribute $100 million annually to its pension fund but only contributes $75 million to balance other priorities. That $25 million gap seems manageable—just 2% of a city budget. But pension funds assume 7-8% annual returns. Missing one contribution doesn't just mean owing $25 million later—it means losing all future investment returns on that money.

After 20 years, that single skipped contribution doesn't cost $25 million but $100 million. Multiply this by decades of underfunding, and you get Illinois' $140 billion pension hole or California's $1 trillion gap. Governments tried to hide this through accounting tricks—assuming unrealistic 8% returns when bonds yield 2%, or using pension obligation bonds (borrowing money to invest in stocks, essentially gambling with public funds).

Demographics turned a problem into a crisis. When pensions were designed, people worked for 40 years and lived 5-10 years in retirement. Now they work 30 years and live 25-30 years in retirement. Birth rates collapsed, meaning fewer workers support each retiree. Healthcare costs exploded, and many pensions include medical benefits. A New York City firefighter retiring today at 50 could collect benefits for more years than they worked.

The cruelest irony of pension crises is that retired teachers' benefits force layoffs of current teachers. In Chicago, pension costs consume 25% of the city budget. Every dollar spent on yesterday's workers is a dollar not spent on today's services. Libraries close, roads crumble, and police departments shrink—not because cities got poorer, but because past promises eat current revenues.

Governments respond with a two-tier caste system. New employees get defined contribution plans (like 401ks) instead of guaranteed pensions. They pay more for health insurance, work longer for lower benefits, and subsidize their predecessors' generous packages. A California teacher hired in 2012 pays 50% more into the pension system than one hired in 2000 but receives 40% less in benefits. This creates poisonous workplace dynamics where younger workers resent older colleagues.

Some cities try bankruptcy to escape pension obligations, but courts usually protect retirement benefits as contractual rights. Others raise taxes, driving away businesses and residents, creating a death spiral—fewer taxpayers supporting more retirees. Illinois loses one resident every five minutes, partly fleeing the nation's highest property taxes used to fund pensions. The ethical dilemma becomes acute: should a city maintain promised pensions for 70-year-old retirees or hire teachers for 7-year-old students?

The pension crisis reveals a fundamental weakness in democratic governance: the temptation to make promises that come due after you leave office. It's not corruption or incompetence—it's the logical result of political incentives meeting demographic reality.

Solutions exist but require political courage rare in democracies. Honest accounting, realistic return assumptions, and shared sacrifice between generations. The alternative is Detroit—where some retirees lost 40% of promised benefits while the city emerged from bankruptcy. The time bomb is ticking, and mathematics doesn't negotiate.