By now, most of you have heard about the mess General Motors is in. Market share is dropping while health and pension costs are still soaring. But have you made the connection to Social Security and Medicare?
GM, Social Security and Medicare all reached their present predicament the same way – by setting up defined benefit plans. That is, in exchange for premiums (or payroll taxes in the cases of Social Security and Medicare), the system will pay retirees a defined benefit.
Ironically, both General Motors and the Social Security system face a similar option to keep their systems afloat: soak the taxpayer.
Private sector corporations pay dues into the Pension Benefit Guaranty Corp. as a sort of premium, in case they run into financial trouble. If the company can’t make its pension payments — as with some of the major airlines recently — they can cash in their chips.
And cash in, they are. According to the PBGC, as of 2004, 2,952 plans, or nearly four in 10 of all participating single employers, had been dropped into PBGC’s lap. PBGC’s is on the hook for $23.3 billion more than what it has in assets.
But that’s nothing compared to what companies face in pension costs — try $450 billion.
Private liability, though, is a proverbial drop in the bucket when looking at Social Security.
The latest trust fund report finds that Social Security owes $5.7 trillion more than it expects to take in over the next 75 years. That’s $5,700 billion, or about nine times what private companies face.
Both GM retirees’ plans and the Social Security system find themselves in this state for one simple reason: They promised more than they could deliver.
And now, in both cases, it is likely the U.S. taxpayer who will have to pick up the tab.