A Long Time Ago in a Galaxy Far Away ...

Ok, it was not a Galaxy that was a Ford car, but it was Detroit and this story is about GM cars, steel and workers. In the in days shortly after WWII, labor was in tight supply. Businesses actually had to compete for workers and started offering incentives that would go beyond simply paying more in wages. And so begins Malcom Gladwell's fascinating article on the economics of employer based pensions and healthcare.

The president of General Motors at the time was Charles E. Wilson, known as Engine Charlie. Wilson was one of the highest-paid corporate executives in America, earning $586,100 (and paying, incidentally, $430,350 in taxes). He was in contract talks with Walter Reuther, the national president of the U.A.W. The two men had already agreed on a cost-of-living allowance. Now Wilson went one step further, and, for the first time, offered every G.M. employee health-care benefits and a pension.

Flash forward to today, and GM and Ford and for that matter just about every company that was around then, is unable to fund its pensions and certainly has stripped the healthcare benefits it once promised to its retired workforce.

America’s private pension system is now in crisis. Over the past few years, American taxpayers have been put at risk of assuming tens of billions of dollars of pension liabilities from once profitable companies. Hundreds of thousands of retired steelworkers and airline employees have seen health-care benefits that were promised to them by their employers vanish. General Motors, the country’s largest automaker, is between forty and fifty billion dollars behind in the money it needs to fulfill its health-care and pension promises. This crisis is sometimes portrayed as the result of corporate America’s excessive generosity in making promises to its workers. But when it comes to retirement, health, disability, and unemployment benefits there is nothing exceptional about the United States: it is average among industrialized countries—more generous than Australia, Canada, Ireland, and Italy, just behind Finland and the United Kingdom, and on a par with the Netherlands and Denmark. The difference is that in most countries the government, or large groups of companies, provides pensions and health insurance. The United States, by contrast, has over the past fifty years followed the lead of Charlie Wilson and the bosses of Toledo and made individual companies responsible for the care of their retirees. It is this fact, as much as any other, that explains the current crisis. In 1950, Charlie Wilson was wrong, and Walter Reuther was right.

American businesses can't compete with the huge financial obligations incurred by the shortsighted business leaders of the past. In macro, this is the problem with the Bush administration policies of spend now/pay later policies that will saddle future workers with outrageous debt to repay (and its bad even now 40% of your tax dollars go to the interest payments on debt incurred by just 3 presidents; Reagan, Bush and Bush)

Innovation mustn't stop with technology. We need smarter solutions to basic problems of how to keep our economy running with the mix of old industries and new industries able to compete globally. Gladwell sums up the problem;

Here, surely, is the absurdity of a system in which individual employers are responsible for providing their own employee benefits. It penalizes companies for doing what they ought to do. General Motors, by American standards, has an old workforce: its average worker is much older than, say, the average worker at Google. That has an immediate effect: health-care costs are a linear function of age. The average cost of health insurance for an employee between the ages of thirty-five and thirty-nine is $3,759 a year, and for someone between the ages of sixty and sixty-four it is $7,622. This goes a long way toward explaining why G.M. has an estimated sixty-two billion dollars in health-care liabilities. The current arrangement discourages employers from hiring or retaining older workers. But don’t we want companies to retain older workers—to hire on the basis of ability and not age? In fact, a system in which companies shoulder their own benefits is ultimately a system that penalizes companies for offering any benefits at all. Many employers have simply decided to let their workers fend for themselves. Given what has so publicly and disastrously happened to companies like General Motors, can you blame them?

The issue of universal healthcare goes beyond what is good for the worker. Its good for business. Short term thinking is what gets companies in trouble. Gladwell's article is long, but worth the entire read, especially on this Labor Day.


New Yorker THE RISK POOL
What’s behind Ireland’s economic miracle—and G.M.’s financial crisis?, MALCOLM GLADWELL, Issue of 2006-08-28.