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The oracle of Delphi: GM's pension disaster and what it means for social security

By Rod D. Martin
web posted October 24, 2005

Delphi's bankruptcy filing -- a result of mounting, unsustainable pension costs incurred decades ago -- was grim news for its creditors, its stockholders, and its tens of thousands of workers. But it was also a warning of things to come: for the entire American auto industry, and for Social Security as well.

Delphi was a GM division until its spinoff in 1999. As part of that deal, America's largest auto maker granted over 4,000 Delphi employees the right to return to GM. Now, those workers are taking General Motors up on its generous promise. GM will take responsibility for their wages and benefits, to the tune of up to $11 billion in increased company costs, all without adding a penny of revenue.

This is a staggering blow for GM, which, like Ford, is already struggling to stay afloat -- despite an increasingly excellent and popular product line -- under the weight of its defined benefit pension plan. And those chickens are already roosting, beginning with the company's astonishing new deal with the UAW to cut retirees' health benefits by a whopping $15 billion.

That the UAW even considered such a plan tells the tale. For more than half a century, the union has demanded ever-escalating contracts, receiving at Delphi not only $60 per hour wages on average, but a vast, defined-benefit pension system too, designed like Social Security, but with far fatter checks. The idea is good, but the structure is nightmarish; and this long, incremental process has put America's car makers in the unsustainable role of supporting two entire, separate workforces, one of which -- being retired -- is permanently idle.

The gut reaction of many is to blame foreign competition for Detroit's problems: skilled Asians taking far less pay. But this is precisely wrong.

For all the talk about "outsourcing", far more jobs are flowing into America than the other way around: three times as many according to management über-guru Peter Drucker. And nowhere is this massive "insourcing" more apparent than in the auto industry: foreign car plants dot the South, paying top wages to the world's best workforce, but avoiding Detroit's union trap.

While the Big Three desperately seek to escape their union straitjacket by building plants abroad, every other carmaker on Earth is taking advantage of the most productive workforce in the world.

It's too late for outsourcing to help Delphi anyway. To save its pension system, Delphi's unions will have to swallow a mind-boggling 66% pay cut. And it only gets worse, for Detroit and for America.

Starting next year, the first wave of America's 78 million baby boomers will reach retirement age. Barring serious reform, an every smaller workforce will have to accept ever smaller wages to support idle, dependent parents who once demanded a bad retirement deal, and who won't even get all of what they bargained for.

Delphi and GM (and Ford and Chrysler) are America's canary in the coal mine. From Delphi to CalPERS to Social Security, America's defined benefits system is heading for trouble. None of this was inevitable. And much of it still isn't. A top-down, centrally planned, one-size-fits-all system -- which every leftist labor boss and politician promised would bring Nirvana -- was always bad economics. And there was always a better way. If you own a 401(k) or an IRA, you're a part of it already.

Personal accounts completely change the equation: no ongoing payments to two separate workforces, and no worries about current profitability, because retirees have received their company contribution long before. No need for current workers to take pay cuts to support their elders either: instead, an ever-improving work product can compete head-on against the Japanese (or whomever), and rising profits can fund current workers' retirements.

Perhaps above all else, personal accounts end all possibility or -- or need for -- benefit cuts to seniors: what's in a private account is yours. No one can ever take it away: not for a pay cut, not for a bankruptcy. And not for some cockamamie new government spending program either. However badly it may have been sold, this is what the President's Social Security plan was trying to achieve for all of us earlier this year.

Defined-benefit pensions are promises which cannot be kept, because companies -- and governments -- are not gods who can tell the future. And the Delphi debacle makes clear: whatever snags the Bush plan faced, America must reach past them and enact real Social Security reform, fast.

The Oracle of Delphi has spoken. Let's pay heed, and nip America's pension disaster in the bud.

Rod D. Martin is Founder and Chairman of Vanguard PAC. A former policy director to Arkansas Gov. Mike Huckabee and Special Counsel to PayPal.com Founder Peter Thiel, he is a member of the Board of Governors of the Council for National Policy, Executive Vice President of the National Federation of Republican Assemblies (NFRA), and editor and co-author of Thank You, President Bush , the definitive handbook to the second term. (c) 2005

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