Social welfare comes home to roost
WASHINGTON -- General Motors has taken an interesting turn: It's going back into the automobile business.
Granted, GM has always been in that, but it has also become the nation's largest private purchaser of health care. This supposedly secondary role has become primary.
GM has been forced to allow product development, pricing and other decisions to be driven by the need to keep sufficient revenues flowing in so they can flow out in fulfillment of GM's function as a welfare state.
GM provides $5.2 billion in health care annually to 1.1 million workers, retirees and dependents. Retirees outnumber current U.S. employees 2.5-to-1. The $4 billion that goes annually to retirees does not go into developing products people want to buy.
Concessions by the United Auto Workers will provide GM with annual savings of $1 billion in cash in health-care costs. But GM's hourly workers, who pay no health-care deductibles and only nominal co-payments, still will enjoy coverage better than most Americans have.
The UAW's willingness to make concessions in a contract that does not expire until 2007 recalls what the union did in the recession of 1982. Then Chrysler was in parlous condition and the UAW reopened a contract in order to give back benefits. But today's givebacks are occurring while a humming economy in the fourth year of expansion has lowered unemployment to 5.1 percent.
Largely because of generous benefits won by the UAW in palmier decades, GM's North American auto business is hemorrhaging money -- $1.6 billion in the third quarter. This is in part because its employee-discount-for-everyone pricing has worked, sort of.
Until that promotion ended at the beginning of this month, GM was selling lots of vehicles -- but losing more than $1,000 per sale. Then in the first nine days after the discounts ended, GM's sales plunged 57 percent.
Shortly before Monday's announcement that the UAW has agreed to trim GM workers' and retirees' benefits, Delphi, the auto parts company that until 1999 was owned by GM, sought bankruptcy protection. Under terms of the 1999 separation, GM may be liable for up to $12 billion of Delphi's pension and health care benefits, which would offset GM's gains from the UAW concessions.
Delphi has 185,000 employees worldwide, 33,000 of them unionized Americans. It's Chapter 11 filing is part of an accelerating avalanche of corporate decisions dismantling "defined-benefits America." As a result, intergenerational strife, which long has been anticipated, may at last be at hand.
Delphi proposes cutting pay and benefits of younger workers from $65 per hour to $20 or less in order to fulfill the promise to retirees of a fixed percentage of their salaries.
Delphi CEO Steve Miller minced no words telling The Wall Street Journal that defined-benefit programs are imprudent anachronisms: "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."
He calculates that a competitive American industrial compensation cost is about $20 an hour. And to get to a total compensation cost of $20, including health care, retirement and workers' compensation "which is high in the states we are in like New York, Ohio and Michigan," you have to have a basic hourly wage of $10. Pay at Delphi's plants in China is roughly $3 an hour.
Miller bluntly says that the social contract written after 1945 is being -- must be -- repealed because, given globalization, unskilled manual labor cannot be paid $65 an hour with the cost passed on to consumers.
"When you buy a Hyundai you get a satellite radio as your option, but if you buy a Chevrolet you get social welfare as an option.
"Long term, the customer is going to desert you if you try to price for your social-welfare costs," Miller says.