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UAW-GM Deal Based On Unrealistic Cost Forecasts

October 26, 2007
Related Topics: Managing Change, Retirement/Pensions, Medical Benefits Law, Latest News
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The recently ratified contract between General Motors and the United Auto Workers, details of which were disclosed to the Securities and Exchange Commission, underscores the precariousness of future retiree health care benefits.

On one hand, analysts say, the deal to transfer $35 billion to an independent trust to manage retiree health care is the best deal the union could have made given the dire financial straits of General Motors. The union will receive 70 cents for every dollar owed to it—allowing GM to offload about $47 billion in liabilities.

At the same time, the deal is based on assumptions that greatly underestimate the cost of health care.

The contract, which remains subject to court and regulatory approval, is based on the assumption that health care costs will grow 5 percent annually—a growth rate significantly slower than in the past 25 years.

From 1970 to 2004, Medicare costs increased an average of 9.1 percent annually. For private sector payers, health care costs increased an average 10.1 percent annually. Gerard Anderson, director of the Center for Hospital Finance and Management at the Johns Hopkins Bloomberg School of Public Health, says such an assumption leaves in doubt the UAW’s ability to pay for retiree health care for the next 80 years, as union leaders have promised.

“The economic trends would suggest it’s not viable in the long run,” Anderson says of the union’s health care trust, known as a voluntary employees beneficiary association.

To make the fund financially sustainable, the union must put its faith in the financial markets, where it will look for returns on par with some of the best-performing institutional investors.

According to GM’s filings, the current health trust is funded based on an expected 9 percent return on investment of the funds assets. That rate of return equals the 10-year return of 9.1 percent for CalPERS, the California state employee pension fund.

Another variable complicating the union’s funding of future retiree health care benefits is that 75 percent of GM’s 74,500 union workers could retire by the end of the four-year contract, significantly adding to the rolls of health care beneficiaries, which today total more than 500,000 people.

The 5 percent estimate is a common accounting technique used by many employers to calculate future health care costs, a GM spokeswoman says, since actual long-term projections yield numbers that are unsustainable for the economy.

In 2005, health care costs totaled 15 percent of the U.S. gross domestic product. That number is expected to grow to 20 percent of GDP by 2015.

But VEBA consultant Lance Wallach says the 5 percent increase in health care costs is deceptive, even if it is a necessary target. For most people, especially blue-collar retirees, health care cost increases are significantly higher.

“That’s not even ridiculous, it’s preposterous,” he says of the 5 percent projection. “I’m not just talking for these people, but for anybody.”

Jeremy Smerd

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