Saturday, December 20, 2008

UAW troubles a harbinger of things to come

While we watch the slow death of the big three from the weight of massive liabilities due to excessively generous pension and health care benefits, it should be noted that the automakers are just an illustration of what will be happening at an even larger scale across the company with another large segment of the workforce:   government employees. 

State employees have pension and health care benefits comparable to what the UAW has extorted from the Big 3.  However, the key difference is that state employees have near iron clad job security.  The Detroit News had a great report on how the Michigan Teachers' Pension plan will bankrupt many districts from their overly generous benefits (see here, here, here).  This is not just a Michigan problem.   Almost every state has this issue, and it will get worse over time.  Most governments will not tackle this because of the power of the state employees unions (see the budget crisis in California and how there are no layoffs, just tax increases).

The difference between the Big 3 and the state governments is that we have no choice in funding the state employees.   We do not have the option to not pay taxes.   The solution has a ton of up front costs and would ensure a huge political and legal fight.   The fair way to deal with this is to convert all defined benefit plans into defined contribution plans (e.g. 401(k)).  It would apply to all workers under a certain age or seniority.   Current retirees or those close to retirement would be exempted.   The same actuaries that run the pension plan would figure out for each plan contributor what their current pension would be if they retired on the conversion date, and the state would pay a lump sum into their 401(k) equal to the amount necessary to buy an annuity at conversion date rates to fund that.   From that point on, the risks are transferred to the employees from the taxpayers.   This would need to be coupled with a plan that makes retirees responsible for their own health care expenses at retirement (like pretty well everyone else who is not a union/government employee).   

This would be the mother of knock down/drag out fights, with legal challenges galore - but it has to be done.  During these tough times, perhaps some forward looking state politicians will start demanding change before the structural costs cripple the economy.

1 comment:

Jack Dean said...

Any public employee pension plan currently in place cannot be modified. The only option is to close the current plan to new employees and set up a new tier for new hires.

You can follow pension crisis news daily on PensionTsunami.com