GM's Pension: A Ticking Time Bomb for Taxpayers?

[Egz]

http://www.time.com/time/busin...yahoo

Quote »

General Motors Corp. may no longer be the world's biggest automaker, but it still operates the country's largest pension fund. The threat to its pension plans has always been an issue, butit took on a new urgency when GM disclosed April 7 that its plans were underfunded by more than $27 billion, with more than half of that being owed to U.S. workers and retirees. Across town, a post- bankrupt Chrysler faces its own pension shortfall. Moreover, a report last week from the Government Accounting Office (GAO) says the pension crisis in the auto industry could create an unprecedented crisis for the federal Pension Benefit Guarantee Corp., a government-sponsored organization to backstop company pensions. When the two automakers emerged from bankruptcy reorganization the pension problems were seen as a more distant issue, and presumably one that would be eased by economic growth. But the auto industry is facing a slow recovery, and neither the new GM nor the new Chrysler has produced a profit. Christopher Liddell, GM's new chief financial officer, has stopped short of predicting that GM will be profitable this year, while Chrysler CEO Sergio Marchionne is hoping Chrysler can break even this year. Both GM and Chrysler are also moving to build smaller vehicles, which have traditionally produced smaller profits. The pension funding crisis could begin in 2013, or before either company is fully profitable. Here are the chief questions raised by the potential pension crisis: Could taxpayers really be on the hook for UAW pensions? Yes. GM could face a funding crisis in 2013 or 2014 when, under the current projections, the automaker will be required to make more than $12 billion in contributions to its pension funds to keep them solvent, according to the GAO analysis. Chrysler's estimated future pension obligation is $3 billion. If the companies cannot meet their funding obligations they may have to terminate their plans, and the financial responsibilities (up to government limits) would be assumed by the Pension Benefit Guarantee Corporation. The funding could easily become a serious challenge for the PBGC, which says it is now facing $168 billion in possible plan terminations across a range of companies, many of them auto suppliers. The PBGC is privately funded, but since it was created by an act of Congress and its board of directors consists of the Secretaries of Labor, Commerce and Treasury, it's possible that the U.S. Government would step in if the agency came up desperately short of funds. Of course, the Obama Administration could allow GM or Chrysler to defer their pension contributions, but there would likely be stiff resistance to another wink-and-a-pass for automakers. Won't a successful IPO of new GM stock resolve the pension funding problem? No. The actual timing of the initial public offering and the amount of money it raises will depend on market conditions. However, even if an IPO is successful the money would go to the U.S. Treasury to repay it for supporting the company through bankruptcy. In addition to direct aid of $8 billion that GM plans to repay, the government also loaned GM another $49.98 billion in exchange for a 61% stake in the automaker with the understanding the GM would do a public offering of stock as a way for the government to get repaid. The same holds true for Chrysler if and when it gets around to an IPO, which CEO Marchionne has said is unlikely before 2012. What happens to GM and Chrysler pensioners if the PBGC takes over the funds? The retirees could face dramatic cuts. The PBGC promises a certain level of benefits, but $35 billion of the two automakers' promised pension benefits fall beyond the PBGC guarantees. In 2010, a single 65-year old retiree is guaranteed a maximum of $54,000 per year under the PBGC guidelines, and many GM retirees have earned benefits in excess of the PBGC limits. Last summer, the PBGC did take over the salaried pension plans belonging to GM's former subsidiary, Delphi Corp. Most of Delphi's 20,000 salaried pensioners, many of whom started out working at GM, saw their pensions cut. Thus, a termination of GM's or Chrysler's pension plans could likely result in pain for both pensioners and taxpayers.

Looks like they still have some potholes in the road ahead they have to watch out for.

[compy222]

ouch. i certainly don't want to be footing the bill on this.

as i understand the salaried program is currently 98% funded and in relatively good shape. it's the hourly/UAW pensions that are hardest hit.

[Big Morgan]

I dislike this sort of "reminder" news, believe it or not we debated a lot of this stuff a year ago.

Anyway the pensioners will take a bigger hit than taxpayers. IIRC the PBGC usually maintains failed pensions to about 30 cents on the dollar (correct me if I'm wrong, but if anything it's probably less).

The "good news" is that if we hadn't bailed out GM and ChryCo those pension plans would already be in the hands of the PBGC.

[juice]

Figures, the golden parachutes are well funded but the guys who actually build the cars get screwed.

[VdubChaos]

And here I thought our government waved a magic wand and fixed GM.

[turbo_nine]

Quote, originally posted by compy222 »

ouch. i certainly don't want to be footing the bill on this.

The wonders of our welfare state ensure that you would either way. Whether it will be in the form of pension checks that GM employees were promised over the course of their career or in social services that some thousands of broke retirees will require.

The question is; which do you think will be cheaper?

[axe]

The gov't buying GM sure was a good idea, right guise?

[pacerhimself]

Quote, originally posted by axe »

The gov't buying GM sure was a good idea, right guise?

Brilliant commentary. It shows a deep understanding of the topic.

[Knock Sensor]

Quote, originally posted by pacerhimself »

Brilliant commentary. It shows a deep understanding of the topic.

You sound like my middle school report card.

[pacerhimself]

Quote, originally posted by Knock Sensor »

You sound like my middle school report card.

That's rough, teachers aren't supposed to be sarcastic in their feedback.

[pacerhimself]

Pretty much everything in the article points to this not having anything to do with the government purchase of GM. You would have to be willfully ignorant to try to tie that into the discussion.

Will an IPO and sale of the company prevent it from happening? Not necessarily.

If the government had let GM fail, would it have prevented it from happening? Nope. It would have caused this to happen sooner.

[John Lee Pettimore]

the cynic in me says the government knew all along they'd be on the hook for the pensions & are just waiting it out until the PBGC takes the funds over & then the payouts can be limited to PBGC maximums.

[compy222]

pbgc varies based on amount of pension owed to you. the smaller the pension, the less you get.

i know the salaried ones backed about 60-65% depending on the number of years you have in.

pretty much my whole family, dad, grandpa, 3 uncles, depend on their GM pensions. not one of them spent less than 20 years. my dad had over 38 and my grandpa 45. those are all salaried pensions though, not the UAW fund that is in serious trouble...

[HaterSlayer]

Why is the UAW fund so much more vulnerable than the salaried people?

[axe]

Quote, originally posted by pacerhimself »

Brilliant commentary. It shows a deep understanding of the topic.

I would have just posted a funny pic, but I tried to be TCL 2.0 compliant.

[Air and water do mix]

Quote, originally posted by juice »

Figures, the golden parachutes are well funded but the guys who actually build the cars get screwed.

$54,000 is a LOT of money for people not producing. (yes, I know not all of them are making that) It's just that time has caught them. In another 20 years Toyota will have the same problem here, too. No, I have no idea how to fix it without severe cutting to pensions.

[Swallow Doretti]

I, for one, am not worried. I figure the newly authorized death panels should take care of this mess quite expediently.

[VdubChaos]

Quote, originally posted by Air and water do mix »

$54,000 is a LOT of money for people not producing. (yes, I know not all of them are making that) It's just that time has caught them. In another 20 years Toyota will have the same problem here, too. No, I have no idea how to fix it without severe cutting to pensions.

Our government does exact same thing with politicians. Once you become a Governor/Senator etc you get paid that salary for the rest of your LIFE.

[uncleho]

Quote, originally posted by Air and water do mix »

$54,000 is a LOT of money for people not producing. (yes, I know not all of them are making that) It's just that time has caught them. In another 20 years Toyota will have the same problem here, too. No, I have no idea how to fix it without severe cutting to pensions.

That's the thing... given pensions, parachutes, and promotions are typical/normal incentives for market-driven societies... what choice is there?

The problem isn't pensions as so many fear. The problem is that incentives like that (to acquire 'good' workers - hourly & salary) should have done just that - good workers = good performance = good long term viability.

GM's history in the last ~1/3rd of its 1st century squandered what should have been. The first decade of its 2nd century was spent trying to make up for the 1st while in denial of the coming fall.

Unfortunately... the GM story has not and probably will not be the only one in this society, because we never seem to follow any Lessons Learned scheme... rather we favor Lessons Forgotten and Continually Repeated. I've always believed GM's Strengths & Weaknesses to be a mirror image of the society in general.

[uncleho]

Quote, originally posted by Swallow Doretti »

I, for one, am not worried. I figure the newly authorized death panels should take care of this mess quite expediently.

Death Panel. That is less cruel a name than I have been using.

I never knew GM had the largest pension responsibility. I knew there were a lot of retirees, but daaaaaamn.

[Beltaine]

New healthcare means all those pensioners will live longer, so figure on it being more expensive than projected.

[turbo_nine]

Quote, originally posted by VdubChaos »

Our government does exact same thing with politicians. Once you become a Governor/Senator etc you get paid that salary for the rest of your LIFE.

And just think -- those politicians weren't "producing" even when they were originally employed.

[Swallow Doretti]

Quote, originally posted by uncleho »

I never knew GM had the largest pension responsibility. I knew there were a lot of retirees, but daaaaaamn.

And we can't add to it, uncleho. When it comes time to retire, they're just going to take you out back behind the factory and shoot you, then tell all your coworkers you went to live "off on a farm" somewhere.

[sdpauly]

I wonder how much of the pension money was invested in MBS and other real-estate derivatives...

The problem wasnt the pension obligations themselves, it's the fact that the trust fund money was invested poorly and not adequately managed by GM. Pensions (and things like Social Security) are not entirely bad if the money isn't squandered on present expenses and nothing put away for the future like they should have.

[melanotaenia]

Pensions are a thing of the past nowadays; you are not going to find as many companies now that are willing to pay a portion of your salary for years after you retire.

But again, I hate GM. This is nobody's fault but GM's. And they know it.

To think that the taxpayer should absorb this shortfall is nothing short of ridiculous.

[Big Morgan]

Quote, originally posted by melanotaenia »

To think that the taxpayer should absorb this shortfall is nothing short of federal law.

FTFY,

The idea is that when a company like GM f*cks over the people that have given it so much, we (as a nation) will try to keep the retirees depending on those pensions out of the poor house.

So to think that taxpayers should absorb the shortfall is to think that GM's workers shouldn't suffer because of its shoddy management.


Modified by Big Morgan at 2:19 PM 4-15-2010

[Jesus is my pilot]

Quote, originally posted by uncleho »

That's the thing... given pensions, parachutes, and promotions are typical/normal incentives for market-driven societies... what choice is there?

False, pensions are not typical or normal.

[Big Morgan]

Quote, originally posted by Jesus is my pilot »

False, pensions are not typical or normal.

Shouldn't you be at a tax protest?

[uncleho]

Quote, originally posted by Jesus is my pilot »

False, pensions are not typical or normal.

So what you are saying is that pensions were not created as an incentive as I suggested (i.e. Companies practice varying options/strategies... be it pensions or promotions or bonuses or stocks or whatever in order to entice good workers.)?

[uncleho]

Quote, originally posted by sdpauly »

I wonder how much of the pension money was invested in MBS and other real-estate derivatives... The problem wasnt the pension obligations themselves, it's the fact that the trust fund money was invested poorly and not adequately managed by GM. Pensions (and things like Social Security) are not entirely bad if the money isn't squandered on present expenses and nothing put away for the future like they should have.

Given that basic logic one of the only obstacles is human longevity, but even that should have been factored in. It's not that simple for sure (because investment = some level of risk... thus... losing your obligation), but... but I'm sure Jesus will enlighten.

[uncleho]

Quote, originally posted by melanotaenia »

Pensions are a thing of the past nowadays; you are not going to find as many companies now that are willing to pay a portion of your salary for years after you retire.

That's pretty much irrelevant to this discussion considering the vast majority obliged the pension have been long retireed (i.e. IIRC the ratio of retiree to currently employed is something like 4 or 5 to 1.).

The fact remains that the creation of pensions was a method to attract (i.e. Incentive). Whether business evolve to choose other methods today (stock share, bonuses, 401k, etc.) is a matter of natural societal/business evolution.

[bmann]

I dunno, seems like expecting one company to support you for your whole life, regardless of how they are doing financially, is a little optimistic. I think the concept is flawed and we should let nature take its course.

Then again, as a 30-something, "pension" has always been part of an antiquated vocabulary for me.

[randyvr6]

What I find interesting is that other than in government, virtually all the traditional pensions for anyone employed 20 years or less have all been switched over to 401Ks. The real implosion is going to be when large numbers of state and local government workers retire with very lucrative pensions and expect the taxpayers to cough up all the extra cash as most of them are severely underfunded right now.

The labor unions in general despise 401K retirement plans for a couple reasons; 1) People are expected to invest some of their own money on top of any company match or contribution, and 2) the market sometimes goes down.

After the current recession when the stock market plunged, many of those same people couldn't help but respond "See, I told you so, 401k plans are for suckers; look at all that money you lost" They don't think about the fact that a 401K belongs directly to the worker, and can be rolled over from 1 job to the next.

Well, true, mine lost 1/3 its value, but you know what, those were paper losses only because I won't be retiring for 12-15 yrs. I can't really concern myself with what it is today even though I have gained back a lot of the losses so far.

Some of those traditional pensions, all of a sudden, don't look as solid as they once were, and maybe the 401K will be a much better deal in the long run.

The real alarming statistic is that analysis shows a very large proportion of people have less than 20K of retirement savings accumulated. When asked however, a equally large proportion also claims they plan on retiring while in their early 50's and enjoying a comfortable lifestyle.

I worked with someone who is approx. 50, and not very bright. He refused to put any of his money into the company 401K other than the company contribution. He needed that money to buy a big screen TV etc. After getting a permanent lay off, he decided to cash it in, take the penalty, and buy a 1972 Chevy hot rod. He actually told me " I didn't put any money into it, so as far as I'm concerned it's free money supplied by the company" I have no idea what he expects to live on after retirement other than Social Security.


Modified by randyvr6 at 4:02 PM 4-15-2010

[Big Morgan]

Quote, originally posted by randyvr6 »

What I find interesting is that other than in government, virtually all the traditional pensions for anyone employed 20 years or less have all been switched over to 401Ks. The real implosion is going to be when large numbers of state and local government workers retire with very lucrative pensions and expect the taxpayers to cough up all the extra cash as most of them are severely underfunded right now.

This. And this is an especially tricky subject as a lot of these people are ineligible for social security.

[cougar]

Quote, originally posted by uncleho »

So what you are saying is that pensions were not created as an incentive as I suggested (i.e. Companies practice varying options/strategies... be it pensions or promotions or bonuses or stocks or whatever in order to entice good workers.)?

He'd actually need to have a real job to understand that sort of thing.