Wednesday, October 12, 2005

Delphi and Unions

When I was at Chicago, I most enjoyed classes on bankrupcy. While horrible to go through, bankrupcy also sharpens the mind in a wonderful way, rewards action, and you either win or lose and move on. There is no fat. Steve Miller (Delphi's new CEO) is a bankrupcy expert, and this transcript certainly highlights his ability to cut the crap and get straight to the point:
What those three industries [airlines, steel, cars] have in common is a social contract, worked out over the past half century with strong centralised labour unions, to elevate their workforces with elaborate defined benefit retirement programmes. Back in the days when you worked for one employer till age 65 and then died at age 70, and when health care was unsophisticated and inexpensive, the social contract inherent in defined benefit programmes perhaps made economic sense.

Today, defined benefit programmes are an anachronism, and we are witnessing the slow agonising death of defined benefits as industrial compensation policy. First off, they force people to stay with one employer, and even though we have a much more mobile and flexible population these days. The lack of portability of defined benefits is a real issue. Second, the notion of having all your retirement eggs in one basket - your employer - is a concentration of risk that is simply inadvisable for anyone in today's fast moving economy. Finally, these programmes have a way of threatening the existence of traditional large employers. GM is a junk bond credit these days as it staggers under a burden of $150 billion of combined pension and health care retirement obligations...

My worries go beyond the auto industry. What I am describing is also embedded in our debates over Social Security and Medicare. The overwhelming voltage in the political third rail of touching these entitlements will forestall corrective action for years, but the problem will only grow. I fear something like inter-generational warfare, as young people increasingly resent having their wages reduced and taxed away to support social programmes for their grandparents' income and health care concerns.
Promises were made in the past that can no longer be kept. Someone is going to have their promise broken, be it young people through very high taxes (so old people can retire early and go on cruises), or old people through decreased benefits (as young people squander their money on plasma TVs).

And the correct lens to view entitlement programs are intergenerational. After all, social security transfers no money from rich to poor because 1) you need to work to get anything out of it, 2) you need to live until 65 to get anything, and 3) the longer you live past 65 the more money you get. Note that none of these conditions are progressive and they also select against blacks since poor and/or black people work less, fail to reach 65 more often, and fail to last past 65 as much as rich and/or white folks. Samething with Medicare (although not Medicaid, which actually does help poor people and rich people smart enough to hide their wealth and qualify for cheap nursing home care).

The only point of having a pay-as-you-go intergenerational transfer program (from an economic perspective) is that it is efficient to transfer some wealth from the future to today because people in the future will be so much richer than people today, and there are usually good bargains to be struck between the rich and poor. I'm guessing that this is what corporate welfare had in mind when setting up their generous pensions, but sadly they have reached the future and they are not rich.

JaneGalt has more here.

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