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Week of 6.23.06

Q&A: Is a Benefits Crisis Looming?

Gerald C. Meyers is a professor of management at the University of Michigan Business School. He is also a former chairman of American Motors Corporation.

Many analysts say that General Motors' wages, pensions and health care benefits will be much less generous than they once were. Is this a move that other companies are likely to repeat?

Gerald C. Meyers Yes, not only are they likely to, they are moving very quickly even as we speak. The established companies and the larger companies in particular are ones that are moving away from the generosity that had been accorded to employees in the past . It's a very strong movement and it's going to mean that people who are joining companies that formerly would have given them exceptionally good benefits -- those benefits can no longer be expected.

Which sectors do you think are most likely to be affected?

Primarily the old line, industrial, unionized companies are going to feel it the most. The contracts that the labor unions have been able to swing with companies like General Motors, the airlines, the steel companies or the 'rust belt' companies for example -- those contracts are cradle-to-grave compensations. Those are the ones that are going to feel it the quickest and the most, and they already are.

What factors are forcing companies to cut their benefits?

The main factor and the overarching factor is global competition. The forces of nations that are producing goods and to some extent services at a much lower cost for wages and benefits. The availability of products and services produced at a very low cost is forcing everyone around the world to wake up and realize that there is a 'China price' and everything is being compared to the 'China price.'

What do you mean by 'China price'?

The 'China price' is kind of a code name for saying 'what is the lowest cost we can get it [a product or service] anywhere around the world.

In most countries outside of the U.S., health care is largely funded by the government and is thus much less of a direct burden on companies. Are health care costs affecting the competitiveness of American companies?

Sure it is. The example of General Motors is very familiar to us in the mid-west. At GM, the cost for healthcare is about $1500 per car and that's more than the steel that goes into the car. Part of the problem at GM is that they have this overhang of 'legacy costs' and healthcare is one of the biggest.

There's no question that the idea which we hold to in the United States is very rarely found elsewhere in the world. To get your healthcare from the place where you work is strange-sounding to the rest of the world because the healthcare of the offshore companies is protected by the government. The worst example, or the best example, depending on how you look at it, is Sweden. But most other countries, and the European countries and Japan to be sure, are saying we're going to protect the health of people at whatever costs it takes. And they say we'll do that through the government system as opposed to trying to rig it out of the hides of the company you work at.

This country has no national healthcare system outside of Medicare and Medicaid, but this is changing and very possibly in the next five to 10 years we'll see state governments coming around to be more generous if they have the funds. There are the unending efforts of the U.S. Congress to come up with some kind of a healthcare plan.

Do you think that some companies will be unable to deliver on the benefits that they have promised their employees?

The landscape is littered with companies that have gone into chapter 11 [bankruptcy protection] in the last two or three years because they couldn't tolerate the heavy healthcare costs. Many of them will go out of business.

Generally, what do you think will happen to pension benefits in the future?

It's pretty clear now that the world of pension benefits is changing. Just about every new pension is going to be with a defined contribution plan as opposed to the old and now fading defined benefit plan. The employee, if they want to be in the pension plan, will be contributing a certain amount to their benefits as they get older. Whatever the results of the investment fund will be the result the person can expect in the way of a pension. That's far different, of course, than a defined benefit plan that says no matter what the result you can expect to get a check of x number of dollars for the rest of your life, even if the market fails, even if the investment is bad. That idea has seen its day and is dying out.

One of the primary investment tools offered to many employees is the 401(k). Is there a fear that employees could be left with a nest egg without the yolk?

Sure. That's very likely to happen if the investment in these 401(k)s are ill-advised, are not spread out over a variety of assets, and not protected accordingly. It's also possible that the person may tap the 401 (k) and take the money out for frivolous reasons and not have anything by the time they get to retirement. So the employee could be left with whatever social security is sent their way when they retire and find they can't live on that and will be in many cases destitute.

Related Information

"Firms aren't our parents or our friends. In the end, we earn what they pay us. So if they have to spend more on our healthcare, they will pay us less in direct wages, but the total compensation will be the same. Lowering our wages or making us pay incremental health costs is pretty much the same thing." -- Laurence J. Kotlikoff in a June 22, 2006 interview with NOW. Kotlikoff is a Professor of Economics at Boston University and a Research Associate at the National Bureau of Economic Research.

Read more of Mr. Kotlikoff's insight and advice on financial planning