Problem Solved, Ah, Not So Much

Following is the text of an article I wrote in early 2008, little did I know then how accurate I would be or more important how far off I was in the timing of my prediction for the consequences of the risks being taken.  In retrospect it appears that both the company and the union were either unaware of their true state of crisis or simply chose to ignore it.  When I wrote the article I was worried about the funds running out of cash, now it turns out the cash will never be placed in the funds at all.

In any case, the retired employees of GM and the other auto companies are far worse off today than when this deal was done. 

Martha, are you sure this was of retirement plan?
Martha, are you sure this was our retirement plan?






Problem “Solved” 

At this juncture all three of the major auto manufacturers in the US have “solved” their retiree health care problem.  The press has used words like “lowered costs” “reduced costs” and eliminated the “liability.”  

What has actually happened has nothing to do with lowering costs in any way, but rather convincing the UAW to take a gigantic risk which no doubt is based at least in part on an assumption that sometime in the future this risk will become a burden of the American taxpayer via a government health care system.

The auto companies have agreed to fund trusts to cover the future health care costs of the retiree group, but the key to making this work is the calculation used to determine the amount of the contribution.  To actually aid the corporations, the amount had to use assumptions which resulted in a number less than used to calculate the FASB liability currently on the books of each company.  

Of course, no one really knows what the correct number will be when all is said and done over the next thirty years or so, hence the risk taken by the UAW.  Will and when will the funds run out of cash and what changes to the retiree benefits will have to be made to keep the fund solvent?  Good questions, but that is a problem that will have to be solved by people other than those who made these deals. 

What has been solved is the accounting problem caused by a change in accounting rules a number of years ago, a change that has also resulted in millions of Americans losing current and future employer-funded health care in retirement; which in the years ahead will change the pattern of early retirement forever. 

The real problem in this case was the overly generous package of benefits demanded by the union and agreed to by the employers that virtually eliminated any stake in health care costs by the retirees (or workers for that matter). The failure of both parties to address the problem years ago when it became apparent that competition in the industry was real, added to the crisis that has now been “solved.” 

A similar problem is faced by many state governments, New Jersey being a prime example, but in that case the people calling the shots (politicians and unions) for all practical purposes are on the same side, standby taxpayers.


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