Things that can’t continue, don’t – a lesson for Social Security

This past week, auto parts maker Delphi filed for bankruptcy. The facts of the case are culled from this WashPost article:

- Delphi lost $4.75 billion in 2004.
- “Workers at Delphi plants make about $27 per hour in wages alone. With health care and other benefits added in, Delphi workers' compensation amounts to about $65 per hour.”
- “When a factory is idled or closed, Delphi and the other Detroit-based auto companies have to pay union workers nearly at the same level as if the plant were fully operating.”

Nice work if you can get it. Unfortunately, consumers are less-than-thrilled to pay for the union premium attached to every new GM car:

Furthermore, foreign auto companies, including Toyota Motor Corp., Honda Motor Co., Nissan Motor Co., BMW AG and Hyundai Motor Co., now have U.S. factories. They have generally put down roots in Southern states where jobs are scarce. Because the factories are new, they do not have the burdens of pension and health care costs that bedevil the American auto companies. The UAW has not had much success in bringing these workers into the union.

WashPost house liberal Meyerson wallows in nostalgia and blames Delphi, GM, and “the combined onslaught of globalization, de-unionization and deregulation” for the problem – everybody except for the virtuous UAW union. It seems to me that a company losing $1 billion a quarter can’t be credibly accused of stiffing its workers. Delphi can’t raise the price of their parts yet they can’t reduce the cost of their production. This industrial welfare state cannot continue, so it’s off to bankruptcy court.

The grim realities at Delphi are paralleled in the Social Security program which will see it’s own revenue-expense imbalance crisis starting in 2017. From Jeff Jacoby in the Boston Globe “Social Security still needs fixing”:

Social Security is hurtling toward a cliff; that is clearly one of the ways in which it is getting worse over time. Because it is a pay-as-you-go scheme, with current retirees' benefits paid from current workers' taxes, it can remain solvent only as long as the ratio of workers to retirees stays comfortably high. But that ratio is plummeting -- from 17-to-1 in the 1950s to only 3-to-1 today. In little more than a decade, payroll taxes will no longer be enough to cover benefits. Social Security's deficits will rapidly explode. By 2020, it will be losing $72 billion a year. By 2030, losses will be $275 billion a year. To keep the system from collapsing, Congress will have no choice but to massively hike taxes, slash benefits -- or both.

General Motors, Delphi, and the United Auto Workers should have looked to the future and made gradual changes in wages and benefits to conform to fiscal realities. By failing to act, workers face an abrupt and sharp drop in wages and benefits. When Social Security and Medicare start gobbling up every federal dollars we can tax and borrow, Americans are going to look back and wish that reformers had done the same.