By now, most Americans know about the desire of GM management and labor unions to have the taxpayers give them billions of dollars. The plan is to keep the Detroit automobile manufacturers going for a while longer. Not even the staunchest advocates of the Detroit bailout believe that giving them billions of dollars will yield any permanent results; everybody plans to re-visit the issue next year.
GM and the UAW find themselves in this position because of a long history of lavish pay and benefit packages for union workers - twice the labor costs of the competition and about three times the non-automotive labor cost. Although there's been a lot of complaint about high-paid managers, there are relatively few of these high-paid people. Plant-floor workers don't get paid as much as the executives, but there are a whole lot more of them. In the grand scheme of things, plant-floor labor cost matters a whole lot more than executive pay but that fact gets lost in the yelling and screaming about making workers sacrifice their livelihoods.
The desire to provide workers with a dignified old age via some sort of pension is a noble and humanitarian impulse, but UAW-type pensions simply aren't practical given that people are living so much longer than expected. The way GM pensions work out, people receive pensions for longer than they worked. One way to look it this is to assume that if people collect pensions for only as long as they work, their actual productivity while working is cut in half. Since the company has to pay the worker one year of retirement for every year of work, their actual productivity in terms of work done per dollar of wages and benefits is cut in half. How well would our economy work if every worker's productivity were cut in half? That's the bottom-line, long-term effect of UAW-style pensions - productivity is cut in half and our lifestyle will suffer.
People are expected to continue living longer and longer unless government regulations make medical research unprofitable. This immense pension cost has driven GM to the point of bankruptcy and makes it impossible to operate the business at a profit even if government continues to shovel billions of tax dollars to Detroit.
As vast as the problems of GM are, and as great the potential damage to our economy should it finally collapse, however, GM's problem with the cost of pensions is nothing compared to the pension problems at all levels of American government.
Government Did It Too
While GM was mortgaging its future to retiree pensions and health care, politicians were doing the same thing by awarding unaffordable pensions and health care to public employees. The difference was that while the UAW was not able to force GM to fire managers who wouldn't give the UAW what it wanted, public employee unions could and did vote politicians who didn't cave on pensions out of office. As a result, New York City employees have been promised pensions which are even more generous than GM's.
The book While America Aged by Roger Lowenstein (New York, Penguin Press, 2008) gives some numbers on page 140. In 2005, the New York City Actuary noted that the city transit system contributed $381 million, or 14% of payroll, to pensions; this was expected to reach $620 million by 2009. Medical costs in 2005 were an additional $410 million. It's interesting to compare these numbers with income tax which runs roughly 30% of payroll. Health care and retirement each cost more than income tax.
The rest of the city was no better off; the fire department paid $490 million in health-care costs, for example. Health care for retired fire workers has been rising fast enough that the taxpayers will soon be paying more for all the retired fire fighters than for all the working fire fighters!
During the recent financial boom, New York City made enough money from income taxes paid by high-flying Wall Street workers that they were able to meet these obligations. Then 2008 happened. With Wall Street bonuses a matter of history and the state facing a corresponding shortfall in income tax receipts, these expenditures are simply not sustainable.
A Noble Failure
There's a fatal flaw in offering benefits 20, 30, or 40 years out - nobody knows what economic conditions will be like when the bills come due. Consider social security. Although the law called social security an insurance program, courts have repeatedly declared it to be a welfare program because Congress can change the benefits at any time. Even if it were an insurance system, there'd be no money in it because our legislators have spent the entire fund, leaving only treasury IOU's; they simply won't leave the money alone. In its greatest high-profit days, GM wasn't able to put enough money aside to fund its pensions. New York City couldn't either. California has been tapping into its employee pension fund, CALPERS has lost a quarter of its value since June and is talking about demanding additional contributions. New Jersey is billions of dollars in the hole yet Gov. Jon Corzine wants county and municipal governments to skip more than $500 million in pension payments to avoid higher property taxes. In an article "The Land of Liabilities," the Economist lists immense unfunded pension liabilities in many states. Maine and New Hampshire have raided the teacher's retirement fund for current expenses, and so on. The overall situation is serious enough that some Congresspersons are calling on government to nationalize everyone's private 401(k) retirement accounts to try to paper over the holes in the public pension problem by snatching private retirement savings.
We see that a) most of the public and private pension systems are under-funded, the money simply isn't there; and b) even if the money were there, what could it be invested in which won't get confiscated or misallocated by government action over a 40 year period? As a nation, as companies, and as individuals, we're trapped between a rock and a very hard place indeed.
So how are all these pension claims going to be paid?
The Economist article ends, "Taxpayers will have to ante up. The main question is when, and how much." There are only two choices: a) pensions won't be paid or b) taxes will go through the roof, collapsing the economy and eventually resulting in (a). Our lawmakers don't dare raise taxes nearly enough to fund the pensions they've already promised, but that doesn't stop them from promising more, regardless of party. George W. Bush, supposedly an arch-conservative, pushed through the largest entitlement expansion of all time in the form of his Medicare drug bill. People we've talked to say, "There's no way this won't be paid, it's protected by law!" No matter what the law says now, however, when pensions start to eat up, say, half of everyone's income, voters will instruct their elected representatives to change the law. There'll be a massive train wreck between taxpayers, public employee unions, and retirees; the longer it's delayed, the worse it will be.
The discussions about bailing out Detroit have inspired state and city governments to ask for bailouts, too. The GM bailout is all about protecting workers' pensions; there is simply no way that any profit-making company can cover the cost of operating an automobile business and pay such generous pension obligations at the same time. Even governments which don't have to make a profit and which cavalierly exact taxes at gunpoint are finding it impossible to keep up with their pension obligations.
Tennessee's Sen. Corker was correct in pointing out that unless the UAW accepts cuts in labor costs which get close to labor costs at Toyota, Honda, and the other transplants - which is to say, having their pay and pensions slashed roughly in half - there's no way any amount of money can do anything more than postpone the inevitable collapse of GM, at vast public expense.
When a private firm goes bankrupt, its pensions are dumped on an agency of the federal government, called the Pension Benefits Guaranty Corporation (PBGC). This agency uses taxpayer dollars to make sure retirees continue to receive a minimum level of benefits, but not nearly as much as they were promised; it usually cuts pensions in half. Even after such a severe pension haircut, so many airlines have dumped their pensions that this agency is well under water.
Lacking the same power to threaten confiscation or print more money, New York State's taxing authority has not been able to handle the cost of meeting its pension obligations while maintaining public services during the downturn; cuts are projected. Could any force other than bankruptcy or acute poverty give New York the strength to stand up to the unions and cut costs? Obviously not; bankruptcy or poverty it shall be, perhaps both. Just the other week we saw an astonishing list of new taxes to clobber New Yorkers when they can least afford it; anyone familiar with the Laffer Curve will not be surprised when these egregious exactions fail to raise the revenue intended and drive still more businesses and residents across the river to more reasonable jurisdictions.
Some politicians are beginning to catch on. New York's Gov. David Paterson called for reduced pension benefits because of budget problems, saying, "We've made too many promises and asked for too few sacrifices. We're going to have to change our culture as we know it." He has the right idea, but one wonders how long New York would tolerate a transit or garbage strike? Nearly a hundred years ago, London suffered a railway strike; the commuters saw this as an opportunity for train-lovers to finally try their hand at running locomotives. Service carried on, more or less, under the hands of amateurs. The famous author C.S. Lewis reported there being "surprisingly few accidents," but one shudders to think of what OSHA would think of such a solution.Points to Ponder
It's clear that lifetime pensions of the GM or New York City form are simply unsustainable; there's no way we can afford the loss of productivity implied by having workers collect pensions, which can be close to their final pay levels, for more years than they spent working. Even with city taxes that are high enough to drive many citizens to move elsewhere, neither New York City nor California are able to fund a pension system that covers only a few; GM can't make enough money to fund its pension obligations either.
Neither private business sales nor public taxation authority are able to fund pensions and health care for even a fraction of the overall population. How do we expect the Federal government to be able to handle pensions and health care for the entire population - particularly if they've already spent the "Full Faith and Credit of the United States" to prop up ill-advised pension promises made to the lucky few? How democratic is it to take Joe the Plumber's money to fund a UAW worker's early retirement?
What's the solution?
We have to go back to the traditional means of social security - not because we want to, but because it's the only road left. There is only one investment that's likely to hold value over a 50 year period without government stealing it, and that's children. In the past, old people were cared for by their children; in some countries, it's a crime for children not to take care of their parents.
The men who designed the Social Security system deliberately set out to break the bonds between generations so that people would have fewer children, but they overdid it: our birth rate has plummeted, and uneducated illegal immigrants working for starvation wages in sweatshops aren't going to pay the difference. When the real crash comes, and nothing can stop it, old people who don't have enough children to care for them will be SOL. There's going to be a great many childless yuppies wishing, in their old age, that they had someone to care for them; or, God forbid, standing beside them bearing arms.