I’m a fan of author Roger Lowenstein because he is able to turn complex business issues and events into something everybody can understand. I already reviewed and recommended his other books When Genius Failed and Origins of the Crash. Roger Lowenstein published a new book While America Aged in May. Once again, this new book lived up to the high standard I come to expect from him.
The book is about the challenges of private and public pension and retiree health care programs. It consists of three long case studies: General Motors, New York city subway system, and the City of San Diego. It showed how there is such a big gap between the funding and the benefits liability in the pension and retiree health care programs. The book chronicled how the gap was formed. It also gave some recommendations on how to reduce or eliminate the gap.
The book is thoroughly researched. Every chapter has more than 50 references in the end notes. The story telling is amazing. For anyone interested in the history and the future of pension and health care programs, I highly recommend this book.
Although the book is not about Social Security and Medicare, I can’t help but think about how Social Security and Medicare are in similar situations. The most I can relate to is what happened at General Motors. GM emerged after World War II as the dominant player in the auto industry. The industry was also growing rapidly. GM had great profits year after year starting in the 1950s. Over time it added more and more pension and health care benefits for its employees in order to buy their cooperation for not striking and disrupting the great business.
In its hay day, GM represented a nation we crave for today. It had universal health care — all employees and retirees, plus their families, are covered, for free. It had unemployment insurance — 95% of pay for 6 months. It had a rich pension program. Workers could retire in their early fifties and receive on average $42,000 a year (in 2008 dollars) plus automatic cost of living adjustment (“COLA”) for the rest of their life. After a worker or retiree died, the surviving spouse received a survivorship pension too. Blue Cross became GM’s largest supplier. People jokingly said GM was actually a pension plan on wheels or a HMO with showrooms.
Then the game changed. Facing foreign competition, GM cratered under the weight of its long-term obligations. Because it paid out so much cash toward pension and retiree health care, it couldn’t invest enough in R&D. Had GM thought about it carefully, they would’ve seen that the benefits programs were clearly not sustainable. Workers who retired while the times were good fared really well. Workers who weren’t retired yet lost their jobs.
Social Security and Medicare also had a similar history of expansion. Social Security started in 1935. Over the years, dependent and survivorship benefits were added (1939). Disability benefits were added (1956). Benefits were increased many times and, in 1975, Cost of Living Adjustments became automatic. Average benefit check increased from about $400 a month to $1,100 a month today (all in 2008 dollars).
Medicare started in 1965. It didn’t cover prescription drugs. Then prescription drugs coverage was added in 2006. Because of the rapid increase in the cost of health care and the increase in longevity, Medicare is projected to be in serious deficit.
Are Social Security and Medicare sustainable in their current form? No. If they are not sustainable, we should scale them back, now. I’d rather have a smaller sustainable program than a program which benefits one generation but bankrupts the next, like GM’s rich benefits programs did to GM. Raise the retirement age. Slow down the COLA. Implement means-testing and make the program benefits a sliding scale relative to income and wealth. Make the programs last.