The three stories told in the book (“While America Aged” by Roger Lowenstein) reminds me of the classic tales of a man selling his soul to the devil in return for riches and power. When the devil returns after the contract period to collect his “new” soul, the man desperately tries to avoid the fate he agreed to.
The first story is about General Motors (GM). As the unions became more powerful and smart, they demanded “future” benefits instead of large immediate pay increases. These future benefits included pension plans, health plans and retiree health plans. GM was always desperate to avoid strikes so tended to cave easily on benefits that were largely far in the future or soft. Even better, in those days you didn’t have to show the liabilities in your financials and even when you did you could use creative accounting to deflate the actual liability… so the shareholders were largely in the dark. But ultimately, the rising costs of these benefits at the same time that worker versus retiree ratio has significantly decreased has led to the decline of the company in the marketplace. GM could no longer invest in new products, innovations and productivity leading to a loss of market share and profits… shareholders were the big losers.
The second story is about how New York transit union bargained itself into bigger future benefits at earlier and earlier ages. Politicians basically caved on pensions because by the time bills came due they would not be in office and in the shorter term they desperately wanted to avoid transit strikes which had a crippling effect on the city.
The third story is about how the city of San Diego avoided raising taxes by stripping services and severely underfunded the pension fund. Essentially, they kept workers by trading future benefits (pensions) for smaller wage increases. But the truly sad part is how they worked hand in hand with several unions, the city and the pension boards to manipulate the system so that they didn’t have to pay the bills until someone else would be in office.
In all these cases the pensions are either government sponsored or insured by a government agency.
Notice a recurring theme in the stories?
In all cases, the leadership, unions and employees are selling out the future generations for gains in the present. It’s not the benefits, it’s who pays and when that is the concern. This would all be avoided or at least the risk would be mitigated if the bills for the future had to be paid in the present instead of being deferred.
But if that was true we would never hear commercials like “No money down and no payments until 2010”. Yes, we are a society of reward now and pay the price later… but ultimately the devil will collect.