GM's pension pain

Salon.com

Many people are asking quite reasonable questions about what would happen to General Motors retirees in the event of a GM bankruptcy. The short answer, I think, is that they're pretty much screwed however this game plays out, bankruptcy or no bankruptcy. It's hard to see how we can avoid facing up to the fact that we have three auto makers who have far too much capacity to build cars that Americans don't want to buy. One way or another, they are going to have to consolidate and shrink. Factories will close, more workers will lose their jobs and continuing to find cash to pay for legacy benefits will be a major struggle.

The only ways out are two, to my mind, equally unlikely outcomes. Firstly, the US government hands over $US40 billion to GM, Ford and Chrysler, and they somehow manage to pull off a miraculous turnaround pumping out hybrids and electric cars that brings them back to profitability in short order. Or secondly, the US government itself takes over the responsibility of providing retiree benefits. I don't think the management of the Big Three has proven itself capable of executing such a business plan, and I'm doubtful the US government has the guts to just step in and bail out workers and retirees. (Although I'm open to having my mind changed.)

The issue of how to pay United Auto Workers retiree benefits was supposed to have been settled in 2007, when the UAW made a series of concessions that ensured new auto industry hires would be paid on a scale that was competitive with what foreign car makers operating in the US pay their workers, in return for the establishment of a new retiree healthcare fund called a Voluntary Employee Beneficiary Association. VEBA was supposed to start taking over the distribution of benefits in 2010, but somehow, the auto companies suddenly find themselves lacking the cash they were supposed to endow the VEBA trust with.

The UAW understands all too well the plight the auto makers are in – they're not selling any cars – which is why UAW president Ron Gettelfinger announced on Wednesday that the UAW was willing to allow the auto makers to delay putting money into the VEBA trust.

The auto makers argue that the vast expense of paying for the legacy benefits of hundreds of thousands of retired workers is the main reason they haven't been able to compete with foreign car makers. This is difficult for me to reconcile with the memory of the record profits GM and Ford were making just half a dozen years ago. But never mind: one way to look at their request for bailout cash is as a gambit to get the US government to hand over billions of dollars that can be used to cover those legacy costs while the industry retools. This raises an obvious question: why bother with a middleman? Why doesn't the government just take over retiree benefits directly.

If only the Big Three had listened to Walter Reuther, the legendary long-time leader of the UAW, long before the spectres of foreign competition and high gas prices pummelled them into submission. There is no better time than right now to return to "The Risk Pool," a fantastic article Malcolm Gladwell wrote for the New Yorker two years ago that tells the story of how Detroit initially saddled itself with responsibilities it can no longer afford.

"In 1950, Walter Reuther, the president of the UAW, was negotiating a new contract with "Engine" Charlie Wilson, the CEO of GM.

The two men had already agreed on a cost-of-living allowance. Now Wilson went one step further, and, for the first time, offered every G.M. employee health-care benefits and a pension.

Reuther had his doubts ... His inclination was to fight for changes that benefited every worker, not just those lucky enough to be employed by General Motors ... The labour movement believed that the safest and most efficient way to provide insurance against ill health or old age was to spread the costs and risks of benefits over the biggest and most diverse group possible. Walter Reuther, as Nelson Lichtenstein argues in his definitive biography, believed that risk ought to be broadly collectivized. Charlie Wilson, on the other hand, felt ... that collectivization was a threat to the free market and to the autonomy of business owners. In his view, companies themselves ought to assume the risks of providing insurance."

And thus was written into stone the eventual doom of General Motors. Because what happened, in the long run, is that GM's legacy responsibilities grew as its actual workforce shrank.

"Technology led to great advances in productivity, so that when the bulge of workers hired in the middle of the century retired and began drawing pensions, there was no one replacing them in the workforce. General Motors today makes more cars and trucks than it did in the early 1960s, but it does so with about a third of the employees. In 1962, GM had 464,000 US employees and was paying benefits to 40,000 retirees and their spouses, for a dependency ratio of one pensioner to 11.6 employees. Last year, it had a 141,000 workers and paid benefits to 453,000 retirees, for a dependency ratio of 3.2 to 1."

If Reuther's advice had been followed, and healthcare and company pensions had, for example, been effectively nationalised, fluctuations in the fortunes of any single company would not affect a worker's access to benefits. Even better, companies would be better able to compete in a global marketplace.

So, how do we ensure that workers and retirees don't get crushed by the implosion of the Big Three? Simple. Any bailout, restructuring or government-overseen bankruptcy should be accompanied by comprehensive healthcare reform for all workers, along with substantial improvements in the safety net such as wage insurance, extended unemployment benefits, training and education subsidies.