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Japanese Cars, American Retirees
By Eduardo Porter, New York Times
May
19, 2006
"The higher legacy costs are reflected in a less modern product," said George E. Hoffer, a professor of economics at Virginia Commonwealth University who has studied the auto industry. "They had to cut costs somewhere else and they cut costs in retooling."
Japanese companies face little of this burden in Japan, where the government covers retirees' health care and pays a bigger share of workers' pensions.
Toyota expected to pay out about $700 million in pension benefits in fiscal year 2006, which ended in March. That's less than a tenth of what G.M. expects to pay on its pensions this year.
In the United States, retirees of the Japanese companies pay part of their health care costs. And the Japanese companies' pension obligations are a fraction of that of the American carmakers.
While G.M. paid $5.4 billion last year for the health care of its 141,000 workers, 449,000 retirees and their dependents, Toyota said in its 2005 annual report that its obligations to cover the health care expenses for its retirees "are not material."
At Honda, a 60-year-old retiree with 10 years of service would typically pay $345 a month for health care; a 62-year-old retiree with 25 years at the company would pay $70. Toyota also requires retirees to pay part of their premiums, based on years of service.
In general, these retirees are cut off from the company health plan when they turn 65, and receive instead a lump sum with which they can buy supplementary insurance to Medicare. Honda is alone among the big three Japanese carmakers to still offer a defined-benefit pension guaranteeing a monthly check to newly retired workers in the United States.
At Toyota, a worker's pension consists of an investment account in which the company deposits the equivalent of 5 percent of a worker's earnings each year, typically around $3,000 to $3,500. An employee can supplement that with a 401(k) plan, and the company matches contributions up to a maximum of 4 percent of the worker's income.
For the company, these retirement packages carry no uncertainty. But they do for workers, whose nest eggs depend on their contributions and the financial markets.
Consider Richard Baugh. The 61-year-old worker, who applies sealant on Camrys, Solaras and Avalons in the paint room, is planning to retire next January after 17 years at Toyota's factory here, to tend his horses and teach at his local church in nearby Cynthiana.
His wife, Ruth, 58, will also retire after 14 years at the plant. With total savings of some $700,000, the Baughs feel ready for retirement. They were thrifty, plowing at least 12 percent of their wages into their 401(k)'s.
"After the stock market crash we stayed invested and kept buying, and our 401(k) roared back," Mr. Baugh said.
With less than 25 years at the company, they will have to pay a portion of their health insurance premium, which Mr. Baugh said would amount to some $300 a month.
Tim Garrett, vice president of administration at Honda Manufacturing of America, says talk of the Big Three's "legacy" problem is overblown. Had they set enough money aside when the workers were active, their retirement would not be costing them anything today. "Depending on your decisions you will have legacy costs or you will not have legacy costs," Mr. Garrett said. "We have no legacy costs."
To be fair, Detroit's car companies were no more shortsighted than many companies in other industries. From steelmakers to telephone companies, free health and defined pension checks were a staple of the retirement packages negotiated between America's industrial titans and their unions half a century ago.
When these companies were growing quickly, providing generous retirement benefits seemed cheaper than offering better pay, a future cost that often did not even have to be accounted for on the financial books.
From 1990 to 2005, G.M.'s payroll shrank by two-thirds, and its current work force is now just one-third the number of its retirees and their dependents.
Today, defined-benefit pensions are dwindling across industries, as companies force retirees and active workers to pick up part of their health costs.
According to a survey by the Kaiser Family Foundation, only one out of three big companies now provide health care coverage for their retirees, down from two-thirds in 1988.
In 2003, 22 million workers were covered by some sort of defined-benefit pension, 8 million fewer than in 1980, according to the Center for Retirement Research at Boston College. And the number of workers in
defined-contribution plans jumped to 52 million, from 14.5 million, over the same period.
Union contracts have limited what Detroit's car companies can do with their blue-collar workers, but they are paring back where they can.
G.M. eliminated health care coverage for its salaried, nonunion retirees hired after 1993. This year, it froze the salaried workers' defined-contribution
pension plan. Chrysler made its salaried workers pay more for their health care
starting this year.
Under an agreement last year with the autoworkers' union, retirees at G.M. and Ford will start paying part of their health care costs, up to $370 a year for an individual and $752 for a retiree's family.
With Detroit sagging under the burden of these "legacy" costs, it is unsurprising — even to executives at the Big Three — that the Japanese companies arriving in America chose to do things differently.
"These are well-managed companies," said Frederick A. Henderson, G.M.'s chief financial officer. "It is natural that they would look at our experience and say 'I don't want to do that.' "
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