A NEW LOOK AT THE 80-YEAR PROMISE
A NEW LOOK AT THE 80-YEAR PROMISE
UAW health trust faces big doubts
Some experts, workers fear retiree funding will run out
December 23, 2007
First of two parts
A historic new trust intended to pay the health costs of UAW retirees from Detroit’s automakers could run out of money much sooner than the 80 years union President Ron Gettelfinger said it would last.
Industry experts say the scant public information about the trust — known as a voluntary employees’ beneficiary association, or VEBA — provides little comfort that current benefits will remain as promised for hundreds of thousands of UAW retirees.
The UAW’s plan has two key problems:
• Automakers are paying an estimated $52 billion to shift $88 billion in retiree health care liabilities to the union-run trust — leaving about $36 billion unfunded.
• The plan assumes health care inflation falls to 5% by 2013 and stays at that level, even though it has averaged almost double that rate in recent decades.
"They’ve got ridiculous assumptions on health care costs," said Lance Wallach, a VEBA consultant in the New York City area. "It’s not even close to being realistic, it’s preposterous. … Unless they make drastic changes to the way they treat health care, I’d be surprised if the money lasts 20 years."
If the money runs out, many of the 750,000 retired workers, surviving spouses and dependents who are to receive benefits under the trust would have to rely on Medicare and need supplemental health insurance, even though they were told those costs would be covered.
Union members and outside experts said the UAW will have difficulty keeping its commitments unless the federal government has a national health care system within 5-15 years.
People familiar with the VEBA planning dispute those assessments, saying their analysis of life expectancies, investment returns and health care cost inflation shows otherwise.
The UAW would not comment for this report and hasn’t publicly shared a detailed analysis that supports the promise.
The promise
Gettelfinger first committed the VEBA to an eight-decade run at 4 a.m. Sept. 26, when he announced that the UAW had called off its nationwide strike of General Motors Corp. because the parties had agreed on a new 4-year labor contract.
He said the VEBA would "secure the benefits of our retirees and every seniority employee who is on the rolls as of Sept. 14, and that stretches out in our projections for the next 80 years."
In the following weeks, the union made the same promise to members at Chrysler LLC and Ford Motor Co.
The UAW, like the automakers, won’t divulge details about ages of members and other factors that are crucial to determining the plan’s soundness. Gettelfinger says to trust him.
"It’s a very simple thing, based on cash flow and solvency," he said in September. "I can assure you that based on the trend and the discount rates and other projections, that VEBA will be solvent for 80 years."
When asked for clarification, he said: "Eighty years, eight-zero, as in E-I-G-H-T-Y."
Defenders of the promise say the VEBA will save costs by implementing healthy living programs and taking advantage of the size of its population to negotiate lower costs. They say that help from a national health care system seems more likely than ever before, and if put into effect would essentially transform the VEBA to a supplemental Medicare plan.
The problems
But critics say the same cost-saving measures were available to the automakers, whose leaders said they could no longer afford the rising costs. The critics point out that the prospect of national health care has been a possibility for decades and remains theoretical. And they say the health care inflation assumptions for the VEBA are low and could lead to an even faster evaporation of the trust’s funds.
The largest problem, several VEBA consultants say, is the UAW’s 5% inflation figure.
"It’s an aggressive assumption," said Mark Wilkerson, a consultant with VEBA Service Group in Spokane, Wash.
Medicare costs have risen an average of 9.1% for the past 24 years, and private-sector health inflation has averaged 10.1%, said Gerard Anderson, director of the Center for Hospital Finance and Management at the Johns Hopkins Bloomberg School of Public Health.
"I think it is overly optimistic to think in the next 75 years it will only average 5%," said Anderson, who sits on a Medicare committee that studies such trends. "We have not figured out how to do that for the past millennium, so I’m not sure we’re going to be able to do that over the next 75 years."
The UAW expects the VEBA to average a 9% annual return on its investments. Regardless of the assumptions, many workers say they don’t believe that the independent board of trustees that will manage the VEBA can make $52 billion cover $88 billion in costs.
"I can’t say I have any hopes that this VEBA will last," said Gary Walkowicz, 57, of Ford’s Dearborn Truck plant.
Jim Robinson, a skilled trades worker at GM’s assembly plant in Arlington, Texas, said he didn’t see how it could last. "But I haven’t seen much," he said. "The union is treating it like everything’s got to be a secret, and whenever I’ve seen that happen, that’s not a good thing. … I’m not very pleased."
Defensive maneuver
Although the UAW describes the VEBA as a solid plan to provide benefits, in part it was a defensive maneuver.
Such trusts protect workers from corporate bankruptcies that typically wipe out retiree benefits. For automakers posting record losses, that is not an unthinkable prospect.
And it wouldn’t even have to come to that. In letters to retirees, the union argued that if the money wasn’t transferred to the VEBAs, the automakers could have sought court approval to simply terminate retiree medical benefits.
"The win on the union side is that they’ve got additional security because they actually have the money in their hands," said Dale Yamamoto, chief health actuary at Hewitt Associates LLC near Chicago.
The VEBA is expected to begin negotiating benefits for about 750,000 people in 2010. It doesn’t include active workers, and grows only to add retirees who were employees Sept. 14. It will not cover new hires.
And the VEBA first must go through a court-approval process, which is expected to begin early in 2008.
Big pile of money
Additionally, the union could benefit if it can hold its health care inflation to 5%.
Mike Raleigh, a finance director at GM, defends the 5% long-term estimate, saying the automaker’s health plans often outperformed Medicare.
He also noted that the UAW plan includes rate increases for retirees. And the UAW could cut costs where the automakers could not, Yamamoto and others acknowledge.
"We’re now looking at, with the VEBA, is the second-largest health care purchasing pool next to the federal government," said Kristin Dziczek, senior project manager at the Center for Automotive Research in Ann Arbor. "If they don’t have some power over pricing, then shame on them."
Ultimately, though, Raleigh and others argue that politics or other factors must begin to slow the rate of inflation, or the country will go bankrupt.
Sean McAlinden, chief economist at the Center for Automotive Research, said the VEBA money would last.
"It will last 80 years because it is a Big Pile of money," he said in an e-mail. "GM retirees and the active UAW labor force are quite elderly. Eighty years from now, only a handful will be left — maybe no one.
"If it runs out before 2087, you can yell at Mr. Gettelfinger — but I guess he’s 63 now."
