Protecting Pensions Is Good For GM and the Country

Once, what was good for General Motors was good for the United States. This past week, the chief executive of General Motors — along with his counterparts at Ford and Chrysler — tried to convince Congress that the saying still holds true.

Their pleas for a financial bailout seemed as difficult of a sale as their large-size, low-mileage vehicles. Members of Congress and others pilloried automakers for their failure to innovate and the inability to respond to changing market conditions quickly enough.

Automotive executives certainly are guilty of many failures. But one issue cited by critics deserves closer examination. It is the charge that a contributing factor to American automakers' financial distress is excessively generous pension benefits for retirees.

Writer Malcolm Gladwell has pointed out in The New Yorker that retirement, health care, disability and unemployment benefits provided to U.S. autoworkers actually are about average for the industrialized nations.

The real issue for U.S. automakers — and steel makers and aircraft manufacturers and other industries — isn't that benefits are too generous. It's that there are too many retired people getting them, compared with the number of working men and women left at the companies that provide them.

For all of Detroit's mistakes and misjudgments, its pension problem is mostly a function of excessive success. America's automakers have prospered for so many decades that now there are hundreds of thousands of retired autoworkers. But thanks to steady improvements in production efficiency, the industry has far fewer workers now than it did in early 1960s.

When American car companies and the unions representing their workers agreed in 1950 to create retirement pensions for employees, some of the people eligible to receive the new benefit were workers on the brink of retirement.

Because the pension system had just been devised, they had paid nothing into it. When these long-time workers retired soon after, it put the companies instantly in the hole in funding their pension obligations.

Each time pensions were renegotiated in a new contract, the hole got deeper. The hope — based on actuarial tables of life expectancy — was that companies would catch up in time and that retirement plans eventually would have the funds they needed to fulfill the promises made to workers. Until then, the difference would have to come from profits earned by those who still were working.

In 1962, G.M employed 460,000 American workers, and it was providing retirement benefits to about 40,000 former employees. By 2005, G.M. had about 140,000 employees in this country, but it was paying benefits to 450,000 retirees. Those numbers simply cannot be sustained.

Almost six decades ago, management theorist Peter Drucker wrote that pension benefits offered by individual companies amount to long-term bets on the financial security of each single business. "Is there any one company or any industry whose future can be predicted with certainty for even 10 years ahead?" he asked.

As former workers at G.M., Bethlehem Steel, American Airlines and numerous others can attest, the answer is no.

In most other developed countries, governments provide pension benefits directly to retired workers, using money collected from private businesses. So instead of betting their future security on the fate of one company or even one industry, workers are betting on their own country's economies as a whole. The approach creates the largest possible pool and, therefore, the smallest possible risk. In the long term, that's a more sensible solution to the pension crisis that's still roiling American corporations.

Companies shouldn't be penalized because they've been successful enough to stay in business for a long time. A national pension system would allow them to remain competitive. It also would protect the interests of the retired workers whose skill and dedication helped make that success a reality.