… just wait until the pension collapse hits. That’s the premise of While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis. The book was written, presumably, in 2007, and published in May 2008. The author has already been proved wrong as the U.S. managed to initiate a worldwide financial crisis without referring to pension debt. Nonetheless, the book is interesting for its demonstration of a dynamic in which managers, politicians and union leaders, pursuing their self-interest, manage to wreck enterprises, states, and ultimately countries.
I’m working my way through the first part of the book, which concentrates on General Motors. The management of GM gets a heavy whipping by the author. The leaders of GM were accustomed to a growing car market. The U.S. had 4 cars for every 10 Americans in 1950. By the 1970s there were 10 cars for every 10 Americans and growth slowed to 1 percent per year. The leaders of GM were accustomed to an oligopoly in which any costs could be passed on to consumers through price increases. As long as Ford and Chrysler were also subject to similar union agreements, there was no problem with agreeing to higher wages, benefits, and retirement benefits. They could not see a day in which Japanese, Korean, or Chinese manufacturers would be able to sell significant numbers of cars in the U.S.
What did the GM managers agree to? Workers could retire at age 48, assuming that they started with the company at age 18. GM would pay for all of their health care costs and health care for their dependents, regardless of what advances in medical technology or increases in health care prices transpired. Workers would be paid when not working (the “jobs bank”, initially limited to less than one year but eventually extended to infinity). By agreeing to these long-term obligations, GM bought short-term freedom from strikes and therefore higher short-term profits. If a liability 30 years in the future ended up bankrupting the company, that would be some other manager’s problem.
What did union leaders agree to? Underfunded pension plans. At non-union companies, pension plans tended to be pretty well funded. If the company promised to pay money in the future, it put aside cash now. In collusion with management, union leaders allowed companies to skimp on present cash outlays. The union leader was able to claim a big victory to his members, though he knew if the company went into bankruptcy 20 or 40 years hence the promises would never be fulfilled (though perhaps the UAW leaders were prescient; after sucking all of the value out of GM they were able to top up their pension plans with $100 billion of taxpayer money (extracting taxes from 65-year-old workers at Walmart to pay 50-year-old GM retirees)).
Politicians running cities and states behave more or less the same as GM’s managers. In order to win electoral support from public employee unions they agree to crushing burdens to be paid by taxpayers 20 or 30 years from now.
Social Security is not the nation’s biggest problem, according to the author. Congress can, and probably will, keep raising the age of eligibility for benefits. A person retiring in 2015 might have to be 75 years old in order to draw Social Security, for example. That would instantly solve any problems with the system. A pension obligation, however, cannot be revoked except in bankruptcy.
The lunacy of pension commitments is presented fairly clearly. When GM would agree to give fat pensions to all of its workers, that included someone who was 47 years old, for example. The guy was one year away from retirement and GM was promising to pay him a lot of money for each of his remaining years of life (maybe more than 60 years; one GM retiree was drawing a pension at age 111, plus supplemental health care). That might have worked if GM had been putting aside cash for the years that this guy had been working at the company, but as the pension commitment was new there was no way that they had been. The UAW had its retirees as voting members and they would often negotiate higher pensions for workers who had already retired. GM management agreed to pay people for whom there was no possibility of putting aside pension funding as they worked (because they were no longer working).
In 2008, GM was promising to pay an 18-year-old employee a pension when he retired in 2038. They were also promising to pay for the guy’s health care during his retirement, regardless of what procedures, tests, and drugs were available starting in 2038 and continuing through perhaps the year 2100 (anything that Medicare didn’t pay, GM was promising to pay). A company that promised a defined pension benefit was betting its life on interest rates. If the pension plan was set up when interest rates were 10 percent per year and interest rates subsequently fell to 5 percent per year, the company could easily go bankrupt, wiping out shareholders. If the War on Cancer that President Nixon declared in 1971 had been won, the company would certainly have gone bankrupt.
The author of this book paints GM as truly the dumbest company on the planet, though presumably municipalities will end up looking just as bad pretty soon (esp. if low interest rates continue to prevail). The GM managers set things up so that they needed to continue growing in output, health care costs per person had to stop inflating, interest rates needed to remain high, and foreign competitors needed to be excluded from the U.S. market. If any of those conditions failed, the company would go bankrupt.
What can we learn from this book? If you’re a shareholder in a company that allows people to retire at age 50, sell immediately. If you’re a taxpayer in a city or state that allows people to retire at age 41 (MBTA here in the Boston area, for example), move. Eventually the government will have to confiscate your house and all of the rest of your assets in order to pay its pension obligations.
More: read the book.