Sunday, December 27, 2009

The pension problem is only going to get worse

For holiday reading, I picked up While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis by Roger Lowenstein, the author of When Genius Failed. The story is a sad tale of greed and incompetence.

Unions have used benefits as a way to again more for their members when there was no current cash available for workers. There was no problem with fighting for benefits because the liabilities were out in the future. There was no cost with gaining health care and pensions because it was expected that companies would always grow. The companies and the state were willing to cave on these issues because they did not have to worry about the cost hitting the bottom line. It will be a problem for future management. Well the future is now and it is not pleasant.

General Motors was willing to provide the Detroit compact with workers during the 1950's because it had a dominant business. The dominance is gone and there are not enough workers to support the pension benefits for all of the retires. The pensions are underfunded and the benefits will never pay-off. General Motors has been taken over by the government and the public will likely be stuck with these liabilities.

The NYC subway system workers were given benefits to avoid strikes. The workers got to retire early but the city now has a system that cannot support retires. The population has declined. Ridership has declined and the pensions are underfunded.

San Diego has the same problem and the contract with retirees for pensions cannot be broken. by state law. The citizens will have to pay higher taxes. What happens of the population decides to move?

Pension insurance is not the answer. A government takeover is likely but what about all of the workers who did not get these sweet retirement program? Should they pay for the benefits of others that they will never see? The demographics just do not work. This crisis will be as bad as the health care problem. How are younger workers going to fund these costs?

Will this be a problem for 2010? Unlikely, but it will have to be addressed as we try and deal with the huge budget deficits.

No comments: