Should taxpayers subsidize Chrysler retiree pensions or health care?

The Administration’s negotiations with Chrysler and their stakeholders have a Thursday deadline. Friday’s Wall Street Journal reported a rumor:

Chrysler and the UAW agreed in 2007 that the auto maker would put $10.3 billion into a union-managed retiree healthcare fund. Half of that would now be paid in equity, with the rest coming over time in cash, either from Chrysler or the U.S. Treasury Department, according to people familiar with the talks.

… Even less clear is what will happen on the pension front. Chrysler’s pension is under-funded to the tune of about $9.3 billion, according to an estimate by the government’s Pension Benefit Guaranty Corp. But it’s unlikely Fiat would agree to take on those obligations as part of any alliance.

It seems compassionate to help Chrysler retirees by having taxpayers subsidize these unfunded promises made by their employer. Doing so would also help facilitate a Chrysler/Fiat deal. There are two significant long-term costs to such an action. It would set an expensive precedent for taxpayers, and it would harm future retirees of other firms. Using taxpayer funds to help Chrysler retirees now would create a perverse incentive for management and labor leaders of other firms to behave even more irresponsibly than they have in the past, by jointly agreeing to underfund future pension and retiree health promises.

Defined benefit pension plans claim to guarantee workers a specific benefit when they retire, but that promise is good only if it is fully funded. If a firm with a defined benefit pension plan goes bankrupt and if the plan is underfunded, then a government-run corporation called the Pension Benefit Guaranty Corporation (PBGC) covers some of the losses:

  • Start by paying benefits up to a ceiling defined by PBGC ($54,000 per year in 2009 for a 65-year old).
  • If you have money left over, keep paying benefits up to the amounts promised to retirees.
  • If you run out of money before paying everyone’s benefit, then PBGC will fill up the remaining gap, but only up to the ceiling. Above the ceiling, workers lose their pensions.

So if you are a retiree with a promised $40K annual pension, you will get the full amount. If you were promised $80K and the fund runs out at $50K, then the PBGC will top you off to $54K. You lose the remaining $26K.

PBGC is designed to be self-sustaining: premiums paid […]