While America Aged: How Pension Debt Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis
The Penguin Press
The economic news this summer has been bleak. We've witnessed, and felt the pain of, bank closures, surging oil prices, growing inflation, and higher unemployment. When it comes to the economy, few of us can bring ourselves to think about problems like our looming retirement crisis, but Roger Lowenstein's sobering book While America Aged shows we ignore it at our peril.
Lowenstein, a veteran Wall-Street Journal reporter, notes that America has approximately 38 million senior citizens, a number that will nearly double to 72 million in a generation and reach one in five by 2030. The Census projects that Ohioans over 65 will increase from 13 percent to 20 percent between 2000 and 2030. Lowenstein argues we are "sitting on a retirement time bomb." A third of Americans do not have any retirement savings-no pension, no 401(k), no private retirement account of any kind.
For those with a pension, Lowenstein shows, assets are grossly inadequate to meet future costs. Using numbers from the Pension Benefit Guaranty Corporation (the FDIC of private pensions), Lowenstein reports that, "In the private sector, employers' pension funds are cumulatively, an astounding $350 billion in deficit," and the public sector is even in worse shape. States and localities that have promised pensions "to millions of present and future retired policemen, teachers, clerical workers, and others are hundreds of billions of dollars behind on their payments to state pension funds." This is money that taxpayer are on the hook for as public pensions can never be defaulted upon.
How we get in this mess? Lowenstein does a masterful job of answering the question by weaving together common threads from the financial and political disasters that have been General Motors, the New York City Subway System and the City of San Diego. All three entities went from being fiscally healthy, indeed robust, to bankrupt. All three made extravagant promises to future retirees, under pressure from labor unions to do so, that they could not afford. General Motors, for example, controlled 51 percent of the world's automobile market in 1955. By 2007, this figure was down to less than 25 percent and falling. General Motors downfall was, Lowenstein argues, directly connected to the fact that it had become a "pension firm on wheels." By the late 1990s, each GM employee was working to support two retired GM workers. Others in the private sector have it worse. By 2001, Bethlehem Steel had one worker for every eight retirees because retirees are living longer.
Of course, no one forced GM to agree to such largesse. They did so expecting, arrogantly, that they would continue to be the dominant automaker, as no doubt did the UAW leadership. In fact, company executives completely failed to read the changing market, both in terms of the quality of the cars they were building and in their attractiveness to buyers, particularly from the standpoints of fuel efficiency and cost. Now, after fighting against increased fuel-efficiency standards for years, the company is once again experiencing déjà vu with the effects of high gasoline prices on its bottom line and its stock price.
New York City and San Diego have made pension promises to public-sector employees that are staggering. Overall, New York City's pension bill soared from $695 million in 2000 to $3.67 billion in 2005. Lowenstein notes this figure is expected to double again by 2009. By the summer of 2005, the San Diego municipal pension fund was $1.7 billion in the hole-a debt equivalent to $6,000 for every San Diego family of four.
Lowenstein's book is a must read for all who care about America's future economic prosperity. It must be noted, the challenges described by Lowenstein are challenges faced by Ohio in spades, as we showed in our 2007 study Golden Peaks and Perilous Cliffs: Rethinking Ohio's Teacher Pension System (see here).