While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis [Bargain Price] (Hardcover)

Reviewed by Phillip Longman

For a married couple, talking about money can be hard. But the cost of using a credit card to put off the conversation is almost always worse. So it is with a company, a city or a country. In While America Aged, financial journalist Roger Lowenstein uses the stories of three deeply encumbered institutions -- General Motors, the New York City subway system and the City of San Diego -- as examples not only of the way most individual Americans conduct their personal finances, but also of how the country as a whole has long lived beyond its means. What these institutions have in common is a sad history of over-confidence in their financial futures, combined with a pattern of half-conscious decisions by all involved -- labor and management, politicians and voters -- to avoid tough choices at the expense of tomorrow. And, as it happens, that tomorrow is now.

Lowenstein's account of how pension debt undid General Motors is particularly telling. In 1949, management and the United Auto Workers were battling over the terms of their next contract. Times were flush as Americans flocked to buy autos in the postwar boom, so GM management was eager to avoid a strike. Meanwhile, autoworkers lacked pensions and feared correctly that the country was still far away from adopting universal health care. These circumstances created an opportunity for a seemingly perfect bargain that came to be known as the "Treaty of Detroit."

GM jumped at a UAW proposal that, in lieu of large wage increases, would set up a pension plan and offer half-price health insurance. The short-term costs would be minimal because, as the UAW pointed out, the average GM worker then had only seven years of experience and a mere fifth were over 50. Left unconsidered was the inevitability that these workers would age, and that if GM did not put aside sufficient funds to pay for their future benefits, the next generation of GM managers and workers would be saddled with an impossible encumbrance.

And that's what happened. Time and again, management and labor struck deals for more generous future benefits without taking into account the resulting liability. As actuaries warned of a long-term buildup of pension debt, GM made the debt disappear on paper by using sunny assumptions about the company's growth prospects -- assumptions that ignored the competition GM would face from foreign automakers that did not have to build huge pension and retiree health care costs into the prices of their cars. By the mid-1990s, GM was compelled to pour so much into its pension fund to make up its deficit that, with the same money, it could have acquired half of Toyota or funded the development of market-dominating, high-efficiency cars to better compete.

This pattern recurred throughout American industry during the second half of the 20th century, and it accounts for much of the decline in the country's industrial competitiveness as well as for myriad market distortions. Railroads, for example, have always been far more energy efficient than trucks and in recent years have made spectacular gains in labor efficiency. Yet among the freight railroads carry is a huge legacy of pension debt under the industry's government-administered and historically underfunded pension plan, which now costs 16 percent of payroll. Most truckers, by contrast, don't even have pensions, let alone have to carry the burden of paying for drivers long since retired. That difference in legacy cost is enough to keep a lot of freight barreling down crowded highways on energy-guzzling trucks instead of going by rail.

The federal government's pension bailout agency, the Pension Benefits Guarantee Corporation, itself faces a liability of more than $14 billion as it pays off the benefits of more than 1.3 million people whose plans have failed. Many other businesses, from Sears to IBM, have frozen their pension funds and shifted workers into defined contribution, or 401(k) plans, which require workers to bear the full risk if their investments lose value. As Teresa Ghilarducci points out in When I'm Sixty-Four, another new book on America's crumbling pension system, these trends leave the next generation of retirees in sorry shape. According to Ghilarducci, the average balance in the 401(k) plans of people approaching retirement age is just $59,000. At today's interest rates, that buys an annuity yielding less than $500 a month, with no adjustment for inflation. A report released last Thursday by the McKinsey Global Institute finds that 69 percent of Americans approaching retirement age lack sufficient funds to avoid a significant decline in their standard of living.

Lowenstein also chronicles the enormous debts now coming due for state and local pension plans. Ever wondered why it costs $2 to ride the New York City subway? Lowenstein will show you that much of the fare goes to cover rides taken in the 1960s and '70s -- that is, for unfunded pension debt. San Diego's municipal pension fund was $1.7 billion in the hole by 2005, a debt equivalent to $6,000 for every family of four in the city.

Having struggled for years to make my own writing on pension issues interesting enough for anyone to want to read, I particularly appreciate Lowenstein's use of real people to illustrate the deeper financial issues involved. Even if they sometimes contain too much detail, there is a kind of gripping, slow-motion train wreck quality to the long, sad stories Lowenstein tells about people and institutions in deep denial. And those stories certainly have a clear moral. Boiling it down to its essence on the book's final page, he concludes, "The most effective remedy -- in pensions, health care, and even in Social Security -- is to banish the credit card. Benefits should not be charged to a future generation; they should be paid for now." Sadly, though, even if we can refrain from borrowing more from our children, we will still bear the dead weight of past borrowing that now falls to us.

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