Costs of Legacy Employee Benefits

In order to preserve labor peace over the post-war period, the Big Three have entered into a Faustian bargain with the United Auto Workers (UAW).

In addition to paying above-market wages, management agreed to a number of very expensive benefit programs. These programs include employee medical, retiree medical, rich pension benefits and a program to pay redundant employees not to work.

If the Big Three go into bankruptcy, the federal government may be forced to assume the unfunded obligations of these benefit programs. The Pension Benefit Guaranty Corporation is already overburdened from unfunded pension obligations from the past.

Perhaps a government bailout could push the Big Three’s unfunded obligations further into the future so our children can deal with them when they are much larger. It will be an off-balance sheet obligation of the federal government that will make politicians feel good but will not solve the long-term problem of reducing these unfunded obligations.

Why would the government want to push off these obligations to future generations? Doesn’t it just drive you crazy seeing these automakers before Congress pleading for a $25 billion bailout, which will do little in the long run to alleviate their woes?

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