All New Giant Sucking Sound!

Submitted by Tully on Sun, 11/23/2008 - 2:50pm

Friday in a comment thread I made the following prediction:

What we will likely see instead is a much-hyped "plan" for the taxpayers to bail out Ford and fund the already-proposed GM/Chrysler merger, while also funding the VEBA shortfalls they're facing from the last UAW deal. And those VEBA shortfalls could be huge--the Big 3 are already committed to handing the UAW a $75 billion trust fund to handle retiree health care obligations.

Handing the Big 3 cash at this point is the exact same thing as handing it directly to the UAW for VEBA, because that's exactly where it will go, with no pain or concessions at all on the part of the union. I'm willing to predict that's exactly what the Big 3 ask for--that the taxpayer directly or indirectly pick up some or all of the tab for VEBA.

Can't you just smell the segue into "National Health Care" coming?

Today, David Broder in a WaPo op/ed:

Some have argued that Obama will be forced to delay his promised effort at health-care reform, either because of the urgency of the economic problems facing the country or because there will be no money in the budget to pay for such an enterprise.

But every indication is that he will not wait. Indeed, he could well argue that the current plight of the Big Three automakers stems in part from the burden that Ford, General Motors and Chrysler are carrying for the failures of our employer-based health-care system. One of their basic competitive disadvantages stems from the fact that Japanese and other foreign carmakers are operating in countries where government and society as a whole -- not individual companies -- pay the costs of health care.

Let's note for the record that "our" health care system, for all its many warts and bleeding sores, did not set up the Big 3 for those retiree health care costs. The UAW and the Big 3's roll-over bargaining did, over decades. And now, with a union-friendly Democratic Party in conrol of both Congress and the White House they will both demand that the taxpayer pick up those "legacy" costs. They will point out (truthfully) that those "legacy" costs are used to construct the $75/hr labor cost figure being used against them, and that they would be much more competitive if they could offload them--on us, the taxpayers.

I'd really love to be wrong here.

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universal health care

Submitted by Anonymous (not verified) on Mon, 11/24/2008 - 12:59am.

How can anyone be against universal heath care?

Everyone should have that. Only people who believe there should be the have and the have nots would be against basic health care for all people in our country.

That is appalling.

LOL. And everyone should

Submitted by Tully on Mon, 11/24/2008 - 1:54am.

LOL. And everyone should also have a pretty pony, and an above-average income, and free gourmet food, and all the sex they want, and...who said anyone was against universal health care in general? Why, it's right up there with peace on earth for popularity!

Now, show us the particulars. You know, the details where the devil dwells? You might notice one of those details in the post, the part where the taxpayers in general might get to pick up the tab for those very generous UAW/Big 3 retiree health care benefits, to the tune of $75 billion or so.

is there any out?

Submitted by bucyrus on Tue, 11/25/2008 - 7:52am.

If the big 3 go chapter 11, does that provide some sort of out in the form a mechanism to shave those benefits downward at all? My understanding is that for whatever reason the gov't already agreed to back the pension and healthcare benefits in the event that the companies utterly ceased to exist, which is what is creating the catch-22 (from ther union PoV) against bankruptcy.

Once the gov't picks these costs up, are they set in stone as a gov't cost? Could the gov't for example, unilaterally decide to manage the medical costs by dumping retirees into medicare instead of committing to finance the current healthcare as is?

__________
I have often said, and oftener think, that this world is a comedy for those who think, and a tragedy for those who feel. -Horace Walpole

I don't believe that's correct, Brian.

Submitted by Tully on Tue, 11/25/2008 - 10:02am.

My understanding is that for whatever reason the gov't already agreed to back the pension and healthcare benefits in the event that the companies utterly ceased to exist, which is what is creating the catch-22 (from ther union PoV) against bankruptcy.

I don't believe that's correct, Brian. The PBGC backs pensions to a certain extent and has the ability to force concessions in underfunded plans by either mandating increased employer funding or [shutting down/taking over] the pension plan. In a shutdown/takeover the PBGC also has a priority claim on company bankruptcy assets to cover the funding gap. But the PBGC guarantees have definite maximum-benefit limits, something like 75% of the promised annual benefit with a cap around $52k/yr.

The 25% coverage gap and the max-benefit cap gives PBGC significant leverage on the labor side to force concessions and bargaining. Their power to force employers to fund up underfunded plans or terminate them gives them leverage on the employer side.

PBGC does not cover promised retiree health care benefits. That's the VEBA part I was referencing. That $75 BILLION agreement is between the Big 3 and the UAW. In a bankruptcy, that union-run VEBA would have to stand in line with the other creditors. No government guarantee there.

The Big 3 have been using the retiree health care "legacy cost" issue to beg concessions/protectionism and tax breaks from the Feds for at least 20 years.

For reference, here's a recent Ford employee buy-out program(s) short sheet from UAW, illustrating how expensive those retirees are. Remember, these are deals that save money for Ford--actually paying the overall promised retirement benefits would be MORE expensive. This is the kind of support you and I are supposed to pick up the tab for--things we non-UAW folks have to sweat (and often fail) to provide ourselves and our families, but are supposed to cheerfully chip in to give to UAW members.

[VEBA = Voluntary Employee Benefits Association. Note word "voluntary."]

thanks I knew my understanding was limited

Submitted by bucyrus on Tue, 11/25/2008 - 10:59am.

Thanks Tully. You da man.

All I had seen were one-sentence or two-sentence descriptions. So I already knew that my understanding was limited to getting that there was something along the lines of some sort of government liability. How it worked was something I didn't no where to start to try to find out. It's troubling when news coverage expends so little time describing the nuts and bolts of the potential liabilities.

I tend to have trouble finding reliable figures quickly when I try to find out myself. For example, when I tried to find out about UAW wages and associated benefits, I was unable to find anything liked detailed data from what I considered a reliable source.

This is IMO a different kind of "media bias" beast, one I attribute not to ideology, but rather to innumeracy and a sense that critical thinking based on data is not something the public has much interest in. Maybe call it "executive summary" bias. [Although I'll cheerfully notice that the UAW has little interest in having the public place Big 3 labor compensation into a meaningful demographic context.]

BTW, I did google VEBA, which was enough to suggest that you were talking about a subset of existing liabilities.
__________
I have often said, and oftener think, that this world is a comedy for those who think, and a tragedy for those who feel. -Horace Walpole

Yeah, the UAW and Big 3 like

Submitted by Tully on Tue, 11/25/2008 - 12:00pm.

Yeah, the UAW and Big 3 like to object to that $75/hr labor cost figure being tossed around by pointing out that's NOT what current UAW workers are getting paid, that a bunch of that is paying for retiree benefits. Which to us taxpayers is a major so effing what? The UAW/3 axis is very very careful to use the average hourly line wage of $25-30/hr or so instead...without mentioning the large hourly-rate cost of benefits for current line workers that goes on top of it.

Just ballparking and I would welcome current figures, but I'd guess that those overall retiree union-contract pension/health costs are something approaching 40% or more of overall current industry labor costs, that the Big 3 pay out almost as much for retirees as they do to people still actually working.

No sympathy for the UAW here--the Big 3 dug that hole with massive union assistance. It's tough to get gung-ho about bailing out people who are able to retire at 50 or 55 with 80% salary and ongoing full benefits and SS/Medicare on top of that later on, when the average American family has to struggle like hell to be able to retire at 65. Why should WE pay for those cushy union retirements? They drove their industry under, not us.

Unfunded liabilities...

Submitted by Pat on Tue, 11/25/2008 - 12:20pm.

It was insane for everybody to negotiate big future retirement and healthcare benefits that would be funded only out of future revenues. The unions COULD have bargained for smaller benefits that were fully funded by contributions from current revenues into investments which are set aside for those future costs. But they didn't. They chose to demand BIG benefits which would be paid for much later down the line. I have little sympathy for them, because in so doing, they accepted the risk that the company wouldn't be around to pay for those benefits.

Just as with Social Security and Medicare, they were borrowing from tomorrow's workers and consumers to pay for benefits for today's workers.

the true and the big but

Submitted by bucyrus on Tue, 11/25/2008 - 12:34pm.

I agree Pat. However I think there's probably a lot more agnosticism these days when it comes to smaller pensions funded by revenues invested for future needs.

And sure, you can argue hopefully or even forcefully hat current events are a blip. But guessing and predicting have so much to do with the efficacy of that approach. Only a fool would refuse today to wonder what kind of asset growth one can rely on in making retirement projections.

There is a huge compounded difference from what you get with mere accumulation to what you get with substantial growth, whether that be 3%, 5%, 7% or 10%+. Three months ago, you could probably say "let's be conservative and assume 5-7% average growth" and few folks would blink.

Here's the thing: you don't ever really know how funded your liabilities actually are. You only have an educated guess. Educated guesses are better than nothing, of course. But still.

And as always, I appreciate your focus on the issue of "who decides" which necessarily militates against something like social security fixed benefits. My point here is that under current circumstances the follow up question to "who decides" is "what if I decide and I decide wrong?"
__________
I have often said, and oftener think, that this world is a comedy for those who think, and a tragedy for those who feel. -Horace Walpole

Yes, well...

Submitted by Pat on Tue, 11/25/2008 - 1:05pm.

The point is that if you don't save ANY MONEY AT ALL for the future liabilities, then it's 100% certain that they must be paid by future consumers and workers.

Certainly, there is a big difference in the amount of funding needed depending on the effective interest paid by the investments. If we were quibbling because the Big Three and the UAW simply made bad investments and needed some help, your comment would be relevant. But they chose not to save any money at all. They knew that payment of the benefits would depend ENTIRELY on the ongoing fiscal health of the companies, and would disappear in bankruptcy (which would not be the case if the companies had contributed to 401(k)s or otherwise invested the money for their future pension obligations).

The Big Three and the UAW knew exactly how funded their liabilities were: ZERO.

yup, not defending

Submitted by bucyrus on Tue, 11/25/2008 - 2:10pm.

Sure. Don't take anything I said as crafted to defend the big 3. I was veering outside that scope by talking about the larger issue of how we fund retirement individually and collectively.

BTW, Pat, I hope you're coming along OK in the wake of your arboreal whomping. Been meaning to mention that. Hope you have a good thanksgiving. Same goes for the SFers out there.
__________
I have often said, and oftener think, that this world is a comedy for those who think, and a tragedy for those who feel. -Horace Walpole

Thanks, Brian...

Submitted by Pat on Tue, 11/25/2008 - 2:36pm.

Just dealing with insurance company and contractors. Insurance companies are all evil, for the record.

Happy Thanksgiving to you, too!

And yet...

Submitted by Tully on Tue, 11/25/2008 - 3:09pm.

Insurance companies are all evil, for the record.

And yet, that's how we pay for health care.

Note that the core of the

Submitted by Tully on Tue, 11/25/2008 - 3:07pm.

Note that the core of the problem is defined-BENEFIT plans versus defined-CONTRIBUTION plans. Only one of them is promises, the other is savings/investment. SS, of course, is defined-BENEFIT.....

A defined-CONTRIBUTION plan in theory cannot be underfunded without some real skullduggery. You can lose value by market fluctuations and/or malfeasance, but the value of your share is what it is.

right to the heart of it

Submitted by bucyrus on Tue, 11/25/2008 - 12:21pm.

I think you go right to what most fair and reasonable people think should be the heart it. Very few taxpayers are down with financing a far cushier deal than then they themselves can expect. But as they age they worry that circumstances and bad luck will overtake them and they'll find themselves unable to afford food, clothes, a roof, and medical care. That's a "there but for the grace of God" thing.

When all is said and done, I think what most Americans can probably (perhaps grumpily) agree to settle in around (and I am saying around, meaning various approximations and ways of getting there can apply) is a system where when you retire you can count on healthcare access like medicare and a subsistence level fixed income benefit like SS, and then the stuff above an unsatisfactory subsistence level is up to you (and your family) to a substantial extent.

I don't mind at all if anyone disagrees with the para above. Just my mileage there, probably not worth arguing about.
__________
I have often said, and oftener think, that this world is a comedy for those who think, and a tragedy for those who feel. -Horace Walpole

They get that too....

Submitted by Tully on Tue, 11/25/2008 - 12:31pm.

The UAW workers get that too....UAW workers are not exempted out from SS and Medicare. We're talking about what their companies/union promised them "over and above." Just to be very clear.

indeed they do

Submitted by bucyrus on Tue, 11/25/2008 - 2:15pm.

That makes it an even better deal. For example, by way of comparison, MA state workers get 80% of the average of their top 2 earning years, from retirement until death. They don't pay into SS, and they don't collect from it.

A better deal than SS, but at least not a double dip. Of course you can wonder whether savvy state employees could conceivably do better than their "lost" SS payment by taking the SS they didn't pay and then investing it. Probably not true given that the employer-paid half would be missing.
__________
I have often said, and oftener think, that this world is a comedy for those who think, and a tragedy for those who feel. -Horace Walpole

See above about

Submitted by Tully on Tue, 11/25/2008 - 3:17pm.

See above about defined-benefit plans and underfunding.

When the defined-benefit bubble of underfunded local/state government plans bursts, we know who will get screwed. Again. The taxpayers.

Louisiana...

Submitted by Pat on Tue, 11/25/2008 - 3:21pm.

Louisiana has been working hard for the past decade or so to fully fund all of our state pension plans. At least until the market tumbled, we were just about there. Not 100%, but much, much closer than most other states.

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