Home » Opinion » Book review
Tension over dumping pensions
By Ni Tao |
April 24, 2010, Saturday
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Print Edition
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A LOT has been written in the press about what led to the downfall of the US Big Three auto makers: General Motors, Ford and Chrysler.
Besides the argument that the trio lost their vision and vigor after many years of resting on their laurels, another widely shared view is that the car makers succumbed to their internal financial burdens. Simply put, exorbitant pension payouts and health care costs.
GM's skewed ratio between active employees and retirees lends credence to the notion that unbearable pension obligations bear the most blame for bringing the once mighty Big Three to their knees.
For every 10 GM workers on the payroll, there are 25 retirees relying on them to fund their pensions.
Quite a few critics have heaped blame on the United Auto Workers, the 355,000-strong union that they accuse of blunting the US auto industry's competitive edge abroad with its constant demands for pay rises and welfare increase for union members.
That is not to say GM was entirely blameless for its own miseries. The prospect of UAW-organized protests may have prevented the company, argue the critics, from overhauling its pension scheme.
However, things are more complex than are popularly assumed, especially on such a technical issue as pension, which is beyond the grasp of mundane minds. For those who believe high, mandatory pension payouts are the biggest culprit of American manufacturing's decline, Fran Hawthorne's book "Pension Dumping" may come as a jolt.
True, the auto industry is overgenerous in doling out benefits. But it is more an exception than the norm. Throughout the American business community there is a noticeable trend of pension dumping, meaning pension promises are not so strictly kept as before, the author argues.
Since baby boomers are entering their retirement at a time when not enough young people are joining the workforce at a replaceable rate, this is putting tremendous strain on the US pension system, as evidenced by the GM case.
The changing business landscape, most notably heightened competition in deregulated sectors like public utilities, contributes to the pressure on fulfilling pension payouts as well.
Unlike companies in the past, US companies now have more leeway to dump pension plans to kill costs when business falls on hard times. Doing so still carries a stigma, but one that has softened over time. Ironically, despite its best efforts to reverse the trend, the US government is to some extent abetting pension dumping.
According to Hawthorne, union leaders -- the UAW falls into this category as typical vested interests -- no longer are ambivalent about accepting terms that would save the rice bowls of active workers while jeopardizing retirees' pensions.
As the author argues, "Skeptics say that the reason unions often sign on to this sort of bargain with the devil is that unions generally represent active employees, not retirees."
Worsening the situation is the ease with which bankruptcy is now approved by federal judges. This is a well-intentioned move by the government, but the result is often quite the opposite. During the process of seeking exit financing to repay debt, moribund companies mostly fall prey to vulture capitalists.
For this reason, pension plans, among other obligations, are the first things these vultures want dumped. Pensioners lie at the lower end of the pecking order when companies file for bankruptcy and liquidate assets. Creditors with secured claims against their assets often get compensated first.
For all the public outcry over pension dumping, and although abundant evidence suggesting that this practice won't turn a sick firm around, more companies are shifting to cheaper pension choices like defined-contribution plans instead of onerous defined-benefit plans. Doing so means the possibility of losing some staff allegiance, but when confronted with "a job and a shrunken pension" and "no job at all," the choice is apparent.
Besides the argument that the trio lost their vision and vigor after many years of resting on their laurels, another widely shared view is that the car makers succumbed to their internal financial burdens. Simply put, exorbitant pension payouts and health care costs.
GM's skewed ratio between active employees and retirees lends credence to the notion that unbearable pension obligations bear the most blame for bringing the once mighty Big Three to their knees.
For every 10 GM workers on the payroll, there are 25 retirees relying on them to fund their pensions.
Quite a few critics have heaped blame on the United Auto Workers, the 355,000-strong union that they accuse of blunting the US auto industry's competitive edge abroad with its constant demands for pay rises and welfare increase for union members.
That is not to say GM was entirely blameless for its own miseries. The prospect of UAW-organized protests may have prevented the company, argue the critics, from overhauling its pension scheme.
However, things are more complex than are popularly assumed, especially on such a technical issue as pension, which is beyond the grasp of mundane minds. For those who believe high, mandatory pension payouts are the biggest culprit of American manufacturing's decline, Fran Hawthorne's book "Pension Dumping" may come as a jolt.
True, the auto industry is overgenerous in doling out benefits. But it is more an exception than the norm. Throughout the American business community there is a noticeable trend of pension dumping, meaning pension promises are not so strictly kept as before, the author argues.
Since baby boomers are entering their retirement at a time when not enough young people are joining the workforce at a replaceable rate, this is putting tremendous strain on the US pension system, as evidenced by the GM case.
The changing business landscape, most notably heightened competition in deregulated sectors like public utilities, contributes to the pressure on fulfilling pension payouts as well.
Unlike companies in the past, US companies now have more leeway to dump pension plans to kill costs when business falls on hard times. Doing so still carries a stigma, but one that has softened over time. Ironically, despite its best efforts to reverse the trend, the US government is to some extent abetting pension dumping.
According to Hawthorne, union leaders -- the UAW falls into this category as typical vested interests -- no longer are ambivalent about accepting terms that would save the rice bowls of active workers while jeopardizing retirees' pensions.
As the author argues, "Skeptics say that the reason unions often sign on to this sort of bargain with the devil is that unions generally represent active employees, not retirees."
Worsening the situation is the ease with which bankruptcy is now approved by federal judges. This is a well-intentioned move by the government, but the result is often quite the opposite. During the process of seeking exit financing to repay debt, moribund companies mostly fall prey to vulture capitalists.
For this reason, pension plans, among other obligations, are the first things these vultures want dumped. Pensioners lie at the lower end of the pecking order when companies file for bankruptcy and liquidate assets. Creditors with secured claims against their assets often get compensated first.
For all the public outcry over pension dumping, and although abundant evidence suggesting that this practice won't turn a sick firm around, more companies are shifting to cheaper pension choices like defined-contribution plans instead of onerous defined-benefit plans. Doing so means the possibility of losing some staff allegiance, but when confronted with "a job and a shrunken pension" and "no job at all," the choice is apparent.
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