Washington Post business columnist Steven Pearlstein was online to talk about his latest column, which looks at the possibility that the "Big Three" automakers may wind up in the throes of a "death spiral."
A transcript follows.
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
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"On the other hand, you could also argue that back in the '60s, when these plans were set up, few could have imagined today's world of global competition, 401(k) benefit plans, 85-year life expectancy and $6,000-per-person retiree health costs."
I'm not sure this is quite the outlook that drove the generous pensions at the time. Remember in the 60s most people (well, most whites, but that was most people in the 60s) were living much, much better than their parents had a generation ago when the first really large modern pension began -- Social Security.
At the time, a common socio-economic outlook was that since productivity and hence income were continually growing, it was entirely reasonable for one generation to steal from the next, who would live so much better anyway. Medicare and the Great Society were premised on the same idea.
Legacy pensions (both private and government) are one way each generation "votes itself money" from its children who are too young to cast a ballot. Another is limiting construction of new housing to protect the value of that part of one's nest egg.
Steven Pearlstein: Interesting points, all. I guess what I was meaning to say here was that, in a world in which there were three car companies, all with the same union and the same basic union contract, it would have been far insightful, indeed, for managers to foresee the day when they had lost half the market to foreign producers, many non-unionized, whose only retiree benefit was an annual contribution to something called a portable individual retirement account.
Interesting column. I agree with your point that, since the taxpayers are going to be on the hook for the pension plans if nothing is done, it makes sense to try to handle things more cheaply.
When 401(k) plans were first being introduced, I remember a lot of people worrying that they were more risky to the retiree than a defined-benefit pension, but it's clear that those pensions carry great risks as well. If I recall correctly, pensions assumed by the PBGC typically pay off only a small fraction of the benefit amount.
Are defined-benefit pensions now wholly a thing of the past, or are there still some companies that offer them?
Steven Pearlstein: Sad as it is to say it, the day of the defined benefit pension is over. Virtually no company is offering to start such plans, although there some who have them who are continuing them for new employees. But even IBM, the model of the paternalistic corporation (non-union, I might add) isn't adding new employees to their traditional defined benefit plan. The world is moving to 401 ks both because they are cheaper and more predictable for the company and because they are portable, which is important in a world in which people change jobs half a dozen times in their working lives. And while I might not agree with his particular plan, I think George Bush has a point that we need to make these things less employer-based, which is a peculiarly American post-war phenomenon, and shift the risk and control either to the individual or the government. From a competitive standpoint, our companies can't make it on global markets if they carry too much of this burden directly.
"Wouldn't shareholders, employees, retirees, creditors and even taxpayers all be better off if there were a process, long before bankruptcy filings, where they could agree to a plan of shared sacrifice that would reduce legacy costs to manageable levels?
I'm not exactly sure how this would work."
Not to worry. There are numerous practitioners of Socialism and Communism who are working on this question for you, Steve.
But not to single you out, the mechanism by which our private enterprises become socialized is the federal bankruptcy court. Companies submit plans that federal judges and their fiduciaries approve. Federal bankruptcy judges as the captains of industry!
Overproduction then continues and the excess supply keeps prices perpetually below the minimum amount necessary for a fair return on capital.
Steven Pearlstein: Ah, a reader with a Ph.D. in economics! Look, I can be as skeptical of how government manages things as the next guy. But I'm also practical and I know that markets don't always get it right the first time either. I don't think its a stupid idea to socialize, as economists would say, some of these legacy costs, since some of the cost of the companies filing for bankruptcy reorganization will be shifted, indirectly, to the rest of the society as well.
As to your other complaint, that the bankruptcy process simply perpetuates the oversupply, that is spot on, and bankruptcy judges have to do a better job at forcing companies to cut production to levels where there is a reasonable chance of long-run success. On that point, I think the airline loan board established after 9/11 failed not because they involved themselves too much in the industry but that they didn't use the loans more creatively to force a restructuring of the entire U.S. industry, including mergers and capacity reduction. There is an example where a little more of the "socialist" medicine would have been better than less.
Can you draw other parallels with the airlines -- seems like low-cost companies like Kia and Hyundai are already nipping at the heels of the Big Three, which have already been savaged by Toyota and other imports.
Steven Pearlstein: The airline parallel is there, although in the case of airlines, legacy costs are not the main cost difference between the old-line carriers and the lower-cost startups. Its pay and workrules and route structure that are the bigger drivers there. But certainly retiree costs contribute to the death spiral, because the new guys have very very modest retiree-related costs -- basically their contribution to 401 k programs.
By the way, we have to be careful here not to go too far and say that the retiree costs have to be equal for their to be a level playing field, competitively. The old line carriers have some advantages from being big and old, in terms of scale efficiencies and brand identity and loyalty and skilled workforces, etc. etc. But I think it is fair to say that, post deregulation, the world changed a lot on the old carriers and legacy costs turn out to be a big burden to carry into the new, deregulated era.
When a company declares bankruptcy, don't the remaining funds go to the government corporation guaranteeing pensions, and new pensions are paid from these remaining funds? Why do people say the taxpayers will be stuck with these pensions?
Steven Pearlstein: The pension guarantee mechanism, as I under it, works like this: once a pension fund is "terminated", either before or during bankruptcy, the pension assets of the company are shifted to the PBGC (the stocks and bonds they purchased for their pension funds). Then, to the degree the pension is underfunded and won't, in an actuarial sense, cover the company's pension obligations, the PBGC will dip into its own funds over the ensuing years to make good on the pension payments to retirees, up to $46,000 a year roughly. The guarantee only runs up to that amount, which is less than the amount many unionized automakers or airline pilots were expecting. Now if the PBGC accepts so much of this unfunded pension liability that it runs out of money (it gets its money by charging all defined benefit plans a premium every year), it can either raise the premiums or go to Congress for a "bailout."
The Pension Benefit Guaranty Corp. is already stretched thin. Given the recent vote, how likely is the current administration to (substantially) expand government intervention in this area?
Steven Pearlstein: Well, they may face the choice between a snake sandwich and a jellyfish milkshake, either of which is distasteful. Either get more involved, maybe with some more money, or do nothing and face the prospect of having lots of underfunded pension plans dumped on them which will require them to raise premiums on other old-line firms that haven't got themselves into trouble (making them less competitive) or asking taxpayers to put more money in the pot. I guess the way I see it is to play a little thought experiment:
How much would you pay to avoid a 25 percent chance that you're going to get stuck with a $10 billion bill? The right answer to that, of course, is $2.5 billion. And that's the way I think the government has to begin thinking about it: assessing the risk of major failures and deciding if it is penny wise and pound foolish not to spend a little now to avoid a big expenditure later.
I applaud your courage to try deal with this issue in a column-length piece when a short book is more what is required. One question I have is to what extent do benefits under the old plans vest at a young age and are portable so that a competitor can hire expertise from the legacy automakers and effectively subsidize the cost of those employees by relying on the legacy automaker's own pension plan?
Steven Pearlstein: Thanks for the compliment. And I have to admit I don't know about the intricacies of pensions to be able to answer your question on vesting. Sorry.
You wrote last week that this is probably the best year we're going to have for some time, saying economic strength has been the result of some lucky breaks. Is oil the largest threat?
washingtonpost.com: Mr. President, Have an Economic Reality Check (Nov. 3, 2004)
Steven Pearlstein: Oil is a big threat. Equally big I think is the combined budget and current account deficits, which are already taking a toll on the dollar and, to a lesser extent, interest rates but could in time could have a much bigger effect in slowing the economy.
What role does technology play in all this? As it reduced the amount of employees a company needed, did managers consider the resulting lower contributions to pension/health funds?
Steven Pearlstein: Excellent question. I'm not sure anyone really thought that through, the idea that greater productivity would, in the long run, cause a big imbalance between the number of active workers and the number of retirees that their work would have to support.
What other industries besides the carmakers and airlines are presenting pension legacy-cost problems? Most heavy industry, like steel and mining, I imagine. Others?
Steven Pearlstein: Oil and chemical workers come to mind. Mining, as you point out. Teamsters. Construction. Basically, your list of big, old line unions.
Where do the Detroit 3 stand on this? Do they have a department devoted to solving this problem? And what about their lobbyists and/or association presence in D.C.? Has anybody forwarded a position paper on their strategy, or what they might be looking for? Excepting official language, what is the under-the-radar noise on this?
Steven Pearlstein: Good question. The heads of the companies have recently suggested that this is a very big and important topic that needs to be addressed before too long, but they haven't really stepped out with any concrete proposals. However, you may remember that the new Medicare drug benefit basically included provisions that will allow them and other old line companies offering retiree health coverage to shift some of that cost to Medicare and Medicare beneficiaries. So that was a backdoor way of socializing some of the legacy costs, amounting to several billion dollars a year, as I recall it for all of them. That was one behind-the-scenes thing they did, but they are reluctant to speak out too loudly because people will start raising the B word (bailout).
Steven Pearlstein: Well, that was a pretty wonky subject, which tends to dampen participation rates in these web discussions. Thanks to those who participated. And see you all next week.