In the ever-changing Preakness of crises facing the nation, the looming pension crisis has moved up a few lengths for the Free Agent, thanks to Roger Lowenstein’s excellent While America Aged. Subtitled How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis, the book lucidly describes the incentives and symbiotic relationships among government, unions, and, always, some third party who will be stuck with the bill, which almost guarantee bankruptcy.
President Obama’s take on GM and Chrysler’s insolvencies blames the companies’ creditors and The Evil Foreigner, and proposes as solutions, making the US taxpayer GM’s biggest creditor and merging Chrysler with red-white-and-blue automaker Fabbrica Italiana Automobili Torino (Fiat). Nowhere does he mention the future pension and health care obligations which could only be shed through a bankruptcy process, although by 2005, the company, market valued at $15 billion, had future obligations to its retirees of $195 billion.
Like GM, our own Metropolitan Transit Authority threw pension benefits at the problem of potentially crippling strikes by its union. Lowenstein defends the Transportation Workers Union’s pension demands on such bases as the workers’ suffering because of low ridership during the Depression and the brutality of the line’s supervisors. The Free Agent sees no more sense in retaining those supervisors than she does in paying the pension required to get workers to suffer the thirty years or so under their tyranny.
In San Diego, the union was a co-conspirator in the city’s criminal underfunding of its pension obligations. Citizens enthusiastically re-elected low-tax candidates, but the house of cards stood until the turns in the stock and housing markets. A city short of cash (but like any gambler, sure its fortunes were just about to turn) bargained away contributions to its employee pensions in return for several increases in its ultimate long-term obligations. (None richer than the city officials themselves, one veteran of a grueling six-year stint as city manager retired with a lifetime pension of $55,000 a year.)
Lowenstein’s prescriptions for what ails the ageing American worker will be sadly familiar to Libertarians. He argues that defined benefit pensions, which did in a phenomenally profitable company, would work if only writ large: to the whole United States. The fact that the much more modest Social Security retirement benefit threatens to overwhelm the current budget doesn’t diminish his belief that bureaucrats and politicians could somehow responsibly handle far greater sums. (He does make the sensible argument that pension obligations should be fully funded, and . . . good luck with that.) The Free Agent, as part of her basic service, offers alternative lessons from the pension debacle:
- There is no entitlement to a twenty-five year paid vacation.
- The United Auto Workers did not do its membership a favor by letting their compensation rise so far above what other auto workers (and similarly skilled non-union workers) make. Detroit has been called a dying city for the past thirty-five years, one reason being that union rules require 90% wages be paid for the first year of a lay-off, so workers are discouraged from moving or changing careers. Ultimately, labor costs made it impossible for GM to compete on price with Toyota and Honda. (Lowenstein credits Japan’s national health insurance, ignoring the fact that Toyota pays through its taxes, rather than directly, but still pays.)
- Politicians always have an incentive to grant benefits, tax breaks, Cash for Klunkers, etc., today and let someone else pay the bills down the road. Corporations do as well, but publicly traded corporations are subject to audits and stock market adjustments to their valuations. Lots of people watch corporations, but the Fourth Estate has been woefully remiss in exposing the actual state of public service. Now that journalists are decrying the decline in their readership, the FA suggests this is a window of opportunity, and that we can get our plastic surgery horror stories elsewhere.
- You can’t keep promises you can’t keep. (Only the federal government can pay its bills by printing money, another reason for it to have no involvement in pensions. If only because it punishes, with the cruelty of inflation, those who take responsibility for saving for their own retirements.) GM’s spinoff parts supplier, Delphi, paid off retirees with a tiny fraction of the benefits they’d been promised when it went bankrupt. How city and state pension balloons will be dealt with remains to be seen, by law—yes, another case of the government exempting itself from laws it imposes on us—their pension obligations cannot be reduced.
- Half a dozen times, including in his recommendations, Lowenstein asserts that governments and heavy industry “rely on” a stable workforce and that pensions pay people to stick around. While the latter is true, the Free Agent suggests that it would cause no harm to subway operation, auto assembly, trash collection, law enforcement, public education, and all the rest, to join the productive part of the economy in evolving a flexible workforce. One that would not have the power to extort compensation beyond what other workers get by threatening to strike.