Rising benefits burden
GM has announced 25,000 layoffs, but other industries face similar cost burdens.
An increasing part of production costs in America comes from the price of promises.Skip to next paragraph
Subscribe Today to the Monitor
There are corporate commitments to provide a pension - some 44 million Americans get a monthly check - that add up to as much as $124 billion a year. There are also healthcare benefits that many companies have agreed to provide, either voluntarily or by union contract, at a cost of billions more each year.
Now, even with the economy far from a recession, the cost of these promises is becoming a drag. On Tuesday, the size of the drag became more apparent for General Motors, which said it would eliminate 25,000 jobs by 2008 - in part because of the cost of its healthcare commitments, now amounting to about $1,500 per car.
The problems go well beyond GM and the other automakers: Some of the nation's steelmakers, airlines, and old-line manufacturers - and even some municipalities - are also carrying large "legacy costs" - and may face similar layoff decisions.
"Big companies that dominated the economic landscape 20 to 30 years ago are really struggling," says John Challenger, CEO of Challenger, Gray & Christmas, a Chicago outplacement company. "This may not be the last major job cut announcement we see this year as other companies, including the other American automakers, struggle to make a profit amid escalating healthcare costs, not to mention the ongoing health benefits to the growing ranks of retirees."
It's also an issue before Congress, which held hearings this week on corporate pension reform. One of the major spurs for this has been the bankruptcy of United Airlines, which dumped its $10 billion pension liability on the Pension Benefit Guaranty Corp. (PBGC), the government insurer supposed to guarantee workers some protection if their employers go under. Because of loopholes in pension rules, many of United's workers were not aware their pension fund was in danger.
Sen. Charles Grassley (R) of Iowa has introduced one bill requiring that pension-fund investments be adequately diversified and workers have access to information about their pension plans.
Sen. Michael Enzi (R) of Wyoming also hopes to introduce a comprehensive reform package aimed at making sure the PBGC remains solvent, says a spokesman, Craig Orfield.
The Democrats have introduced legislation, too, including a bill from Sen. Edward Kennedy (D) of Massachusetts that would impose a six-month moratorium on terminations of some pension plans.
Even though Congress has a tight schedule this year, lobbyists think pension reform might pass. "We do think Congress will take a hard look at this," says Bob Shepler, director of corporate finance and tax at the National Association of Manufacturers (NAM).
He says business is watching the legislation carefully: "They want to preserve their plans and make sure the funding rules Congress comes up with are fair and predictable from a business planning perspective."