Retirees and Pensions Fuel GM’s Downfall

General Motors has declared bankruptcy as a result of a number of things — bad management, poor products and screwy labor relations. But in the end, the biggest problem that GM couldn’t solve concerned the company’s retirees.

GM had about 240,000 workers the day it filed for bankruptcy but had responsibility for the health care of more than 1 million people and owed pensions to more than 650,000. Even with GM’s very real product and work-rule strides of recent years, these obligations made bankruptcy inevitable.

In fact, the entire idea of pensions was bad from the beginning: Public policy should, at minimum, stop encouraging companies to take on any pension obligations.

Although less common than in years past — most companies have switched to "defined contribution" 401(k) and similar plans — pensions still exist in many industries, and many companies find them tempting.

When a company utterly dominates its industry, as GM did from roughly 1955 to 1975, it has every reason to offer pensions. It 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 is that most companies go through a life cycle: They start small, become big, decline and eventually cease to exist. Of the 100 largest companies in 1900, 17 existed in the same form by 2000 and three remained among the 100 largest.

This cycle of creative destruction has accelerated: Of the 100 largest companies in 1999, at least 21 no longer exist in the same form.

It’s the way the economy works. Companies, as management scholar Jim Collins has observed, become large and profitable by focusing on and doing a few things better than anyone else in the world. When tastes change, management loses focus or someone else figures out how to do those things better, even good companies have a hard time remaining great at the things that put them on top in the first place. As a result, they go out of business.

While they don’t cause corporate collapses by themselves, pension obligations accelerate them. It’s likely that a company will offer the most generous pensions when it is at the height of its power, influence and payroll size. As things change, they 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.

Since the government partially backs almost all pension plans, taxpayers often end up on the hook for some of the liabilities when a pension-offering company collapses.
This has to stop. Congress should change the tax code so there are no incentives for companies to go down this foolish road. Corporations should not receive preferential tax treatment, write-offs or anything else for obligations to employees beyond a year or two in the future.

In addition, the federal government should also stop accepting new participants in the Pension Benefit Guaranty Corporation (the deficit-riddled federal agency that provides partial backing for private pensions) and look for ways to wind down its operations. Insofar as the government encourages companies to take on the obligation for employee retirement, it should focus on efforts to improve 401(k)s and similar defined contribution plans. Companies should pay now rather than later.

Getting rid of pensions and corporate-paid retiree health care will have social costs. Ending tax incentives for retiree health care would almost certainly increase already spiraling Medicare costs. Stopping defined-benefit pensions might well result in more people relying on Medicaid for nursing home care. But the alternative — endless bailouts of corporate pension funds and the companies that run them — seems a lot worse.