Wednesday, November 12, 2008

A teachable moment, universal health care edition

There's been some kvetching in the usual corners regarding the costs of employee benefits and the damage that they are doing to the bottom line in Detroit. What I haven't seen anyone address is the rather obvious point that our current health care system places all American industries at a competitive disadvantage on the global scale.

Imagine if GM wasn't also in the health care business?

UPDATE: Spoke too soon. Here's Allan Sloan writing in the Washington Post on Monday,

Then there was the financial elephant in the room. No, it's not the GM and Chrysler pension funds. Those funds are in good shape -- or at least were before the October market meltdown.

The problem is the cash GM and Chrysler need -- and soon -- under terms of the grand bargain the Detroit Three made last year with the United Auto Workers about health care for retirees. GM, Ford, Chrysler and the UAW agreed to have health-care trusts assume responsibility for retiree health care. In return, the companies promised to turn over billions of dollars to the trusts. The amount, while huge, was way less than the cost at which those benefits were carried on the companies' books. Capping the retiree-health liability seemed to promise the companies long-term salvation.

But, boy, is there a near-term problem. By my math, GM and Chrysler have promised to give the trusts a total of $12.5 billion to $18.1 billion in cash -- maybe more -- by early 2010. That's above the $16.8 billion currently in the trusts. Good luck coming up with that money, guys. Or getting more givebacks from the UAW.

GM and Chrysler would almost certainly stop paying retiree health care if they go into bankruptcy before the end of next year. That would be devastating to retirees not old enough for Medicare -- and it is a major reason I don't think that bankruptcy would be a good thing.

1 comment:

Andrew Oh-Willeke said...

The Big Three are overcommitted, especially GM. GM retirees are the leading creditor of the company. They are owed more than bond holders.

The problem is not so much employer provided health care, per se. The problem is that GM is one of the very few employers in the U.S. to provide retiree healthcare, and that the burden of doing so has become much greater as layoffs have increased the ratio of retirees to workers.

In other words, the problem is not employer provided health care, it is collective bargaining agreements that created obligations to former employees that are unsustainable given how much market share GM has lost.

Former employee payments aren't the only obligation that GM is obligated to pay that is more than it can afford. It doesn't save much money when it lays someone off, because laid off employees get more, which makes it hard to shut down money losing operations.

It can't shut down dealers without buying them out, but doesn't need as many dealers now that it has a much smaller share of the vehicle market.

It has bonds it can't afford to pay and very high financing charges.

The hourly total compensation it pays factory workers is more than its competitors that set up new U.S. plants are paying by a large margin.

GM has defined benefit plans that put pressure on its cash flow so it can stay funded. Companies in other industries not only don't have defined benefit plans, but have stopped making matching payments to 401(k) contributions in hard times.

GM's obligations make it almost impossible to downsize enough to reach a profitable scale.

Is this worker's fault? No. But, when a company has promised more than it can deliver, sooner or later, GM is going to default. It is just a matter of time.

Honestly, companies like GM are impacted almost not at all by universal health care vis-a-vis their current employees. They already get big employer health insurance rates which are lower than small business pays. They already cover everyone. Any way you cut it they will end up paying about the same for current employees under any plausible plan. Call it a tax, or call it a premium, it still has to be paid.