Arnold Kling  

What's Bad for General Motors...

Quarterback, Shepherd, Project... Fannie, Freddie, and Doomsday...

Roger Lowenstein writes,

But none of G.M.’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors of its financial flexibility and, ultimately, of its cash.

Whether General Motors was truly done in by its worker benefits is debatable, as Mark Thoma points out.

But if making extravagant commitments on pensions and health care can get you in trouble, I can think of an organization a lot bigger than General Motors to worry about.

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CATEGORIES: Social Security

COMMENTS (8 to date)
8 writes:

Airlines, steelmakers, automakers...the irony is that in order to save the pensions, the Federal Government is usually asked to step in.

As for GM, their labor and management deserve each other.

dearieme writes:

"As for GM, their labor and management deserve each other." It's long been my contention that in Britain the labour force picked the management. By that I mean that bright engineering undergraduates would contemplate the Trade Unions in the car manufacturing industry, and decide to spend their careers elsewhere.

aaron writes:

8, not sure if you got it, but the impication is that the USA is organization to worry about.

Flip writes:

Lowenstein's books on Long Term Capital and Buffett were outstanding but I am less impressed by his book on pensions. If GM hadn't promised large pensions, presumably they would have had to pay higher current wages so I would think it would mostly end up being the same for the company.

TSH writes:

Flip, there is one issue with your theory; you are leaving out the time value of money and all that is entailed therein.

Ted Craig writes:

"If GM hadn't promised large pensions, presumably they would have had to pay higher current wages so I would think it would mostly end up being the same for the company."

No. The Japanese manufacturers pay their U.S. employees about the same hourly wages as the U.S. auto makers. The difference is they offer a 401k plan rather than pensions.

The problems aren't with huge benefits for workers. You're getting something for your money in those cases. They're with huge benefits for non-workers (retirees, surviving spouses, people in the job bank).

And while management at GM (and Ford and Chrysler) has made MANY stupid decisions, many of the decisions that are derided, such as focusing too much on trucks, were driven by labor considerations.

Jim Glass writes:

"If GM hadn't promised large pensions, presumably they would have had to pay higher current wages..."

Now this puts one's finger very near to it.

An employer can afford to pay "so much", $X, for a worker or annual cohort of workers in compensation cost.

If total compensation, including future pensions and health care benefit costs, does not exceed $X at present value, then everything is fine, hunky dory. You give the workers the cash portion of their compensation today and save the present value of their future pension and retiree health benefits in an investment trust and all is right with the world forever.

It doesn't matter if the company collapses in the future due to bad management, peak oil, or Japanese competition. Everything is paid for. And the company won't collapse in the future due to the high cost of employee retirement benefits.

BUT ... if you start thinking, "in the future we'll be even richer than today" and you thus decide to make yourself popular by promising workers benefits that make their total compensation package larger then the cash compensation you could afford to pay them today ... then by arithmetic you are putting your hands into the pockets of the company's stakeholders of the future -- workers, shareholders, whoever.

Then the company of the future is shafted -- because since it's paying for two sets of workers, it can't be competitive. It is going to be short something compared to its competition, capital, ability to pay labor, something.

This is just what these dummies did in the auto industry (not to mention state and municipal retirement plans around the US ... and ... and ... and ...)

They promised workers benefits and pay totalling more than their compensation was worth, with the difference coming not from any current contribution from the firm (it couldn't afford that!) but from the future, parties unspecified.

There's another term for this, it is called "paygo financing". Promise now, fund nothing, pay only later when the bill comes due. And of course, we all know who the the biggest offender there is.

And once you go down this road, with the actual value of labor to the employer no longer a constraint on the size of labor's compensation package, you soon get parties (employers, politicians) rapidly bidding up labor's compensation ... and in no time at all you are in "Ponzi scheme" territory.

I use the word "Ponzi" advisedly -- it is the word Paul Samuelson used as praise of Social Security in the 1960s...

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times ...!

Social Security is squarely based on what has been called the eight wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.

From there, it was just another quick "bid up" to Medicare ... and to $40 trillion present value today in unfunded entitlements, growing over $2 trillion annually.

If when Ted Kennedy first proposed Medicare he had insisted that it be coupled with an immediate tax to collect its full cost on an actuarially sound basis ... that would be a tax increase of >$1.7 trillion annually today ... well, we'd never have had Medicare as we know it, would we?

It's the same process. Now to get back to the original comment...

It wasn't that GM would have had to pay higher wages if it hadn't promised such high retiree benefits. GM could have paid any combination of wages and retiree benefits up to the value that its employees' labor was producing for it then.

It's problem was that it and the UAW decided to make life easy for themselves then by paying much more than that, by tappping into the resources of the future -- creating their own little unfunded Ponzi scheme, the back end of which is coming due now.

Paygo benefits, private and governmental, are effectively Ponzi schemes. Dealing with the back end of these, private and public, is going to be the big story of economics for the next 40 years.

PattiJo writes:

Does anyone know what surviving spouses' benefits are for GM.

My mom's late husband was a salaried employee of GM for many years and retired from there. When he died, my mom was secretive about her finances and never told us anything. She does get surviving spouses medicare supplemental medical insurance from GM which is now being cancelled for everyone by GM. Their letter to all states: "Elligible salaried retirees, surviving spouses will receive a monthly pension increase of $300 to help offset new health care costs". My mom does not receive a GM surviving spouse retirement benefit but gets the supplemental health insurance. What we are wondering is if she never filed for a retirement benefit and/or how can she get the $300 a month pension increase if she does not get a pension in the first place?

Was she entitled to a GM salaried employee's retirement benefits for a surviving spouse all these years and she did not file? How can we find this out?

She is now in a nursing home with dementia so we have no way of asking her anything about this.

thanks. Please email me also at

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