How to Stop Another GM: Abolish Pensions

How to Stop Another GM: Abolish Pensions, by Eli Lehrer
OpenMarket/CEI, June 01, 2009 @ 4:27 pm

GM, of course, declared bankruptcy today. A number of things—bad management, poor products and screwy labor relations—hurt the company. But in the end, the biggest problem GM couldn’t solve related to the company’s liabilities to retirees. The company, which currently employs about 150,000 hourly workers, was responsible for the health care of over 1 million people and pension obligations for over 650,000 people. These pension obligations were probably the largest factor in GM’s demise and public policy should, at minimum, stop encouraging companies to take on anything like them.

The lure of pensions is obvious. A pension is another benefit that a company can provide to its workforce and, although quite attractive (“We’ll support you for life!”) it imposes few up front costs. A company that offers pensions has more money to invest in new products, pay dividends, and meet payroll while simultaneously being able to do well by its existing work force. The problem, however, is that all companies go through a lifecycle: they start small, become big, decline, and eventually go out of business. Of the 100 largest companies in 1900, only 7 existed in the same form by 2000. And this cycle of creative destruction is accelerating, of the 100 largest companies in 2000, by my count, at least 19 have either merged with a similarly-sized company, been bought out, gone bankrupt, or needed a government bailout to stay afloat.

To make matters worse, life expectancy continues to increase meaning that the number of retired people will also increases.Quite simply, pensions are almost always a bad idea for any private company. It’s likely that a company will offer the most generous pensions when it is at the height of its power, influence, and payroll. As things change in the company’s market, it will end up—as GM did—with enormous obligations to people who don’t work for it and no resources or market share to pay for them. As a result, it would make sense, from a public policy perspective, to change the tax code to create disincentives for any promise that a corporation wants to make to its employees down the road. Quite simply, it’s bad for corporations, bad for the economy, and bad for employees. Corporations should not receive any preferential tax treatment, writeoffs, or anything else for any obligations to employees beyond a year or two in the future. A typical corporation just isn’t going to be around to make good on any promises it makes in for the distant future.

Companies that want to offer pensions or retiree health care, of course, would remain free to do so but the tax code should, at minimum, look at this with extreme skepticism. It might well even exact a penalty on companies that chose to compensate their employees this way. As a corollary to this, the federal government should also stop accepting new participants in the Pension Benefit Guaranty Corporation (the federal agency that provides partial backing for private pensions) and look for ways to wind down its operations over time. (Since it has promised to manage certain pension funds and creates a certain reliance interest, it wouldn’t be fair to abolish it right away.)

At the margins, ending tax incentives for pensions and retiree health care would almost certainly increase Medicare costs and might well result in somewhat more people relying on Medicaid for nursing home care. But the alternative—endless bailout of pension funds and the companies that provide them—seems a lot worse.