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  • December 21, 2008 10:58 AM EST by Brian Sullivan

    UAW, Pensions & Retirement: The Black Swan Trumps the Sacred Cow

    Here's the scenario: The roof of your house is on fire.   At the same time a tree falls in your yard, smashing your neighbors fence.   The neighbor comes out and you begin discussing the broken fence, how to fix it and who should cover the cost.   You spend lots of time talking about this, reach a deal and feel good about it.    All while your roof keeps burning and eventually the entire home burns down.   The fence deal doesn't look so good after that.  Neither does the recently-approved auto loan package in that it does not address the "fire" of the massive UAW pension obligations.

    The Wall Street Journal describes the primary terms around the $17.4 billion dollar loan as:

    The deal's ambitious targets for the companies include replacing two-thirds of their debt with stock; using more stock instead of cash to fund retiree health-care obligations; eliminating much-criticized union "jobs banks" that pay laid-off auto workers; and establishing wage structures and workplace rules that are more competitive with foreign rivals.

    Notice the pension costs faced by GM and Chrysler are not even discussed.   They are obvious in their absence.   It is clear that the pensions are sacrosanct, the cow so sacred that it dare not even be discussed.   Sadly, that cow is also the one kicking the lamp over in the barn and setting off the inferno.

    Reference again the New York Times story a week ago laying out the cost differences between the domestic and foreign auto companies.   According to the article, on average GM, Ford and Chrysler pay $3 per hour more in actual wages, $5 per hour more in vacation and overtime, just $1 per more in current benefits, but a whopping $13 per hour more in legacy costs such as pensions.  Put another way, the legacy costs per worker per hour are more than all the other higher costs combined.   Yet the UAW, automakers and the government only continue to discuss the wages and health care issues and leave the real problem of pension reform presumably to the imagination.

    The problem is growing worse by the year, as the UAW workforce continues to age and place an increased burden on the companies.  Check out this page from the UAW's own website, written back in 2003.   It notes that the average age of a GM/Delphi worker was 48.9 that year with the average length of service at 23.3.   30 years of service is the primary retirement figure.   This means that in less than 7 years (2010, as this article was written in 2003) most GM/Delphi workers would be eligible to retire with full benefits.   All the the ripe old age of 56.

    56 years old.  Today, that is basically middle age.  The average lifespan of an American is now nearly 80 years.     It is very likely that many workers will be getting benefits for longer than they actually worked at a given company.

    If the domestics were more profitable than their foreign counterparts the problem may not be so severe.    Yet they are less profitable, indeed not profitable at all.   The Times article also notes that the Detroit 3 sell their cars for an average of $2,500 less than Toyota, Honda and others.  Higher costs, lower margins and selling prices.   It doesn't a PhD in economics to understand the problem.

    The reality is simple: until the domestic auto companies can figure out a way to deal with their crippling legacy and pension costs, they will continue to be at a significant cost disadvantage to their non-union competitors.   The union and its members no doubt consider the pension untouchable.   Understandable, given that more than a million retirees count on it.    Yet the pension is also the problem, and the thing that will likely permanently prevent them from ever being truly cost competitive.

    Which brings us to the decision no one wants to address: find a way to wind down the pensions or find a way to wind down GM, Ford and Chrysler.    Years of fiddling with other aspects of the problem have delayed the need to get to this hard conclusion, but nearly everyone knew it was coming.    The downturn in the economy and credit markets is a problem, but not the problem.   It is merely the "black swan" event that exposed the structural flaw.   It's like having $10,000 in credit card debt on a $100,000 per year salary, having your salary cut to $50,000 and then blaming your bankruptcy on the pay cut.   Yes, the pay cut hurt, but the real problem was the initial debt load.

    If the pension plan is not addressed and altered in a serious manner soon, the only option will be bankruptcy and a breaking of the plan regardless.   The cow may be sacred, but it's not immortal.

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Radarnav

Brian got the business equation correct - the Big 3's operating costs, which include funding the current and legacy pensions plans, are killing them. Gary got it right with the PBGC assuming the pensions and what happens to the retirees. However, the real 8 foot gorilla in this living room, is the political clout of these retire UAW workers and their influence on the Democratic party. The current Democratic leadership does not have the backbone to stand up to the political fallout by forcing the correct economic solution for this NATION, they will do only what is right for their PARTY. Structured Chapter 11 remains the most viable solution. Open up all compensation plans (white collar and blue collar); transfer the pension plan to the PBGC; open up all supplier contracts; kill non-profitable car models and/or production facilities; make the company smaller, leaner, and much more competitive. Both Management and the UAW have to receive a brutal wake-up call - to be competitive in the 21st Century world market means your business model must be based on toady's realities, not from the 30's, 40's and 50's. Anyone in management or union that can't accept this message needs to find another career path. Elsewise, millions of people incomes will be destroyed when the Big 3 goes Chapter 7 (total liquidation) in months!!!!

December 23, 2008 at 11:49 am

Barry

Brian, If Toyota sales are down 30 plus percent and they are sporting their first loss in 70 years this not bode well for the auto industry in general. In trying to figure the economics of this industry I pose this question. If they sold 1 million cars ( my number for hypothetical purposes ) one year ago and sales this year are down 30 percent and this causes a loss does this mean that they don't make money on the first 700,000 cars they sell? If that in deed is the case, they are the most efficient then what chance do GM, Ford and chrysler have of climbing out of this hole.

December 23, 2008 at 11:57 am

Neil, Daytona Beach Fl

Pretty soon there will be a big public backlash against the UAW and the Detroit auto makers. People are getting tired of hearing their problems while never addressing the real issues..

December 27, 2008 at 6:30 pm

GlennC.

56 and at 62 more than 1/2 is dropped , and picked up by Social Security ! These men forced to work overtime and 6 & 7 days a week , payed a First Class Tax Base and Full Social Security / and had NO life ! ( Without a First Class Tax Paying Base , we cannot afford a first class infrastructure ) ? You should think on this !

December 29, 2008 at 6:56 pm

Bean

Living in Detroit 50 something retired UAW employees make more per annum than presently employed engineers at the Big 3. We are so tired of the "entitlement" attitude that, unless the UAW agrees to end the disparity, it will be a cold day (Florida) before we ever buy another Big 3 vehicle. This entire GM Bailout has exposed the ridiculous benefits these UAW people enjoy. A Jobs Bank that pays 85-100% of pay-what makes them think they deserve so much more than the unemployment benefits the rest of American workers qualify for? Further, if the incoming administration merely absorbs the inflated pension costs of the UAW and socializes them onto the back of the American Taxpayer in order to relieve GM Chrysler and Ford of the burden instead of demanding modifications the automakers themselves have been too timid to demand for current and retired UAW members, then I truly believe the American Taxpayer will handle it by refusing to buy the cars. The taxpayers are watching and they aren't happy. Unlike the with the banking fiasco, the consumer gets the last word on the Auto/UAW bailouts via the wallet. Hopefully, the company heads and the UAW leaders realize they must appease not only the Government but also those they expect to continue to purchase their product. Thus far, I haven't seen evidence of that understanding........put more plainly...you are negotiating with the people who you are trying to sell automobiles. Act like it or suffer the consequences.

December 31, 2008 at 9:12 am

Bean

Everyone Should See This-UAW exposed at Ford/The Bosses at Work Rampant Fraud www.clickondetroit.com/video/15908257/index.html

December 31, 2008 at 9:52 am

Rosie the Riveter

I am going cross-eyed in front of my laptop trying to understand this mess! I am a 30 year seniority union employee in Canada paying into a fully funded defined benefit pension plan. The plan is very sound, with very little exposure in the stock market. It is jointly administered by company and union trustees. I plan to retire at 55 after 37 years of service. My employer can go bankrupt any day now, and my accrued pension income, and that of all current retirees is guaranteed - ie fully funded once I reach retirement age. Why then, are the Big 3 paying pension benefits for all of their already retired employees? Should not their pension plans have been funded and protected while they were still employees? Are current employees pensions being funded now, or relying on some miracle in the future? What kind of pension plan is this? The mind boggles...

February 20, 2009 at 12:02 am

about this blog

  • Brian Sullivan joined FOX Business Network (FBN) in April 2008 as an anchor. He co-anchors the 10am-12pm ET hours of the FOX Business block. Prior to joining FBN, Sullivan served as an anchor for Bloomberg Television where he hosted the programs Morning Call and In Focus.

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