Big Three Watch

Yesterday, I briefly noted some emerging problems on the investor side at General Motors. But it's worth pointing out that the problem isn't confined to GM. The other two Detroit titans are in trouble, too. The common ailment of all three American auto manufacturers is their cost-structure, and especially the historically generous packages they have offered to their unionized work force.

However, an article in this morning's New York Times suggests that Chrysler is making progress on getting small health-insurance concessions from the United Auto Workers union (UAW). Certainly no small feat, and, if it sticks, a potential road to future cost savings (although, as the article notes, the introduction of relatively small deductibles for some employees is hardly going to make a dent in overall health costs any time soon).

Yet there is an even bigger problem lurking: pensions. The pension landscape in the pre-401(k) industrial-economy days was marked by large manufacturing giants who would offer their workers generous defined-benefit pensions. And the Big Three are no exception. Even if they were to magically switch their entire current labor force over to defined-contribution plans (like those 401(k)'s) today, they would still have enormous defined-benefit liabilities from the current cohort of retirees the pension plans are supporting.

Which is why trouble in Detroit is a major economic story, and not just a business-page oddity: The taxpayers have to pick up the pieces of these pensions if any of the companies go under. As far as I know, these liabilities are covered under the Pension Benefit Guarantee Corporation, a quasi-public insurer that guarantees retirees a certain pension payment if their erstwhile employer folds. Under normal circumstances the PBGC should be able to support itself the way any normal insurance company would, charging premiums over an actuarial pool that includes all the companies that offer defined-benefit pensions. But lately it's been looking a little undercapitalized (since most healthy companies have shifted to defined-contribution plans, and thus avoid paying premiums into what is essentially a corporate pension-insurance program). So if one or two major bankruptcies should push the PBGC over the edge, taxpayers will be on the hook to meet those obligations, a result of the PBGC's quasi-governmental status.

That all brings us back to the Big Three via the following path: Cranky Economist predicts that, as the automakers step up negotiations with the unions to bring down short-term labor costs, we'll see them increasing the promises they make under their defined-benefit pensions. It's a great ploy for the companies, which is why it's been such a popular tactic in the airline industry: Get your workers to take a pay cut today by promising them better pensions tomorrow. If your business improves, it's more convenient for you to pay them in the future. And if you fold anyway, the PBGC is there to take care of the retirees. Well, us taxpayers ought to care about this, since we can't rule out the possibility that we'll have to pick up the slack down the road.

Bottom line: What happens at the Big Three is everyone's business. We'd better hope that their managements don't make promises they can't keep.