As corporate profits have surged over the last six months, retiree health care benefits have been reduced at many companies. That’s the headline, but the reality is not so simple.
Large, old-line manufacturers with negotiated benefits and lots of retirees (think steel and autos) are facing bigger-than-huge retiree health care costs, driven in large part by benefit plans that don’t even have deductibles or copays. As these firms continue to get hammered by international competitors with much lower labor expenses, they are seeking ways to reduce their costs.
And retiree health care costs are a very big drag on many of these companies, hurting their ability to invest in new products, new employees, new plants and equipment. Sure, GM, Ford, Kaiser Aluminum, US Steel and other companies made lots of decisions, including trading benefits for labor peace, that don’t look so smart in hindsight. And GM and Ford completely missed the boat on fuel economy.
But all that is beside the point. If American manufacturers can’t reduce their cost of health care, they will be increasingly unable to compete.
Here’s one potential solution.
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Interestingly, beginning in 2007, state and local governments will have to quantify and publicly disclose the actuarial value of their pension and retiree healthcare liabilities as well as the extent to which they are unfunded. Previously, many of these entities themselves did not have a very good handle on the magnitude of their liabilities. Going forward, the debt rating agencies will incorporate this information in setting state and local government bond ratings, which, in turn, will affect the interest rate they will have to pay on their debt. Finally, some sorely needed market discipline is coming to this segment of state and local government spending. It’s about time!