Pensions

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GM Healthcare Costs

February 17, 2009 in Current Events | No comments

Today, G.M. and Chrysler must submit a government-mandated recovery plan to Congress.  The N.Y. Times reports that G.M is trying get the United Auto Workers to agree to cutback in its employee and retiree health care benefits.  ”[G.M.] has to address how a company that lost more than $20 billion last year can afford $5 billion a year in medical bills.”  Five billion dollars in medical costs seems like a lot, but how much is it really?

According to the Kaiser Family Foundation, Medicare expenses in the following states were less than $5 billion in 2005:

  • Alaska, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Kentucky, Maine, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia, Wyoming.

Wow.  I couldn’t believe this either when I compared the numbers.  The N.Y. Times article continues stating “ [G.M.'s] future obligations for retiree health care are estimated at $47 billion, and by next year it is required by its contract to contribute more than $10 billion to the trust set up in 2007.”

This is certainly a tough situation.  G.M., Ford and Chrysler are on the hook for billions of current employee and retiree medical expenses.  On the other hand, retired Big 3 autoworkers who put in 30-40 years of service with the promise of life-time healthcare may now be left with limited or no medical coverage.

Like everyone in this economic recession, belt tightening is needed by all parties involved.

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Who should be responsible for your retirement?

December 2, 2008 in Public Policy, Social Security | 2 comments

The Economist reports that Argentina has recently passed “a law to nationalise the country’s private pension system.”  Is this a good thing?

With the stock market in the tank, many individuals yearn for the security of a government-funded retirement plans compared to private, individual investments in stocks and bonds.  However, public pensions may not be so safe after all.

An NBER working paper by Novy-Marx and Rauh finds that public pension funds run by the states in the U.S. are significantly underfunded.  

“We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.”

As a San Diego resident, I know first hand how the government can mess up public pensions.  San Diego was named “Enron by the Sea” because underfunding the public pension system has created an enormous deficit.  City attorney Mike Aguirre is considering having San Diego declare bankruptcy because of the huge shortfall.

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