Comparing Automotive and Steel Industry Legacy Cost Issues

CRS Report for Congress
Comparing Automotive and
Steel Industry Legacy Cost Issues
Updated April 6, 2006
Stephen Cooney
Industry Specialist
Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

Comparing Automotive and Steel Industry Legacy Cost
The October 2005 bankruptcy filing by Delphi Corporation is reportedly the
largest ever in manufacturing and, as Delphi is the largest U.S. automotive parts
supplier, it has been a jolt to the whole industry. Concern is also growing over the
increasing costs and competitive impact of pension and health care benefits paid by
the U.S.-origin manufacturers of motor vehicles, the “Big Three” of General Motors
(GM), Ford, and the Chrysler Group of DaimlerChrysler. The recent experience of
the steel industry with respect to pension and health care legacy costs may influence
the ongoing developments in the automotive sector.
Consolidation of the American steel industry occurred during and after the
period of presidentially determined safeguard relief from import competition, in
2002-03. It involved the shedding of pension and health care liabilities, particularly
on the integrated side of the industry. But while the domestic steel industry,
including the integrated steel mills, the United Steelworkers union (USWA), and the
largely non-union steel minimills, all supported trade relief, they were divided among
themselves on legacy cost issues. These divisions within the industry prevented it
from developing an agreed position on legacy cost legislation. Consequently, when
many steel mills went bankrupt, pensioners and workers lost company-paid health
care and pension benefits, except to the degree that the latter were covered by the
Pension Benefit Guaranty Corporation (PBGC). The health care premiums of some
retirees have also been partly paid through a provision of the Trade Act of 2002 (P.L.


The Big Three do not face as high a ratio of retirees to active workers as the
steel industry, but they find themselves supporting a large number of retirees and
health care beneficiaries, because of benefits established and enhanced through
several decades of collective bargaining. Unlike the steel industry, total automotive
manufacturing employment in the United States today is about the same as in 1990,
not in steady decline. However, much of the gain in employment has been at
internationally owned assembly plants and their suppliers, generally non-union, and
frequently outside the Midwest “auto belt,” while the Big Three have downsized
employment by 600,000 jobs in North America since the early 1980s. Unless all
sides of the industry, including the Big Three, the international competitors, and the
industry’s unions, can agree on a plan to deal with legacy costs, the impact of
industry changes for retirees and health care beneficiaries could be determined once
again in the bankruptcy courts.
Thus, legacy costs are again a major issue faced by Congress. Legislation in the

109th Congress includes bills to reform PBGC, particularly H.R. 2830 and S. 1783;

to seek reduced costs through use of information technology (as in S. 1418); and, to
allow persons not eligible for Medicare to “buy in” to the program (as proposed in
H.R. 2072). S. 2045, introduced on November 17, 2005, proposes federal payment
of 10% of a domestic automotive manufacturer’s retiree health care costs, in
exchange for increased investment in producing fuel-efficient vehicles. This report
will not be updated.

In troduction ......................................................1
The Automotive Industry Seeks to Reduce Legacy Costs...................1
Comparing Steel and Automotive Legacy Costs..........................6
Competitive Splits in the Automotive and Steel Sectors....................9
Seeking Consensus on Legacy Costs: Lessons from the Steel Industry.......12
Congressional Options on Automotive Legacy Costs.....................14
Tax Deductions for Legacy Cost Contributions......................15
PBGC Reform...............................................16
Reducing Health Care Costs....................................17
Expanding Medicare and Government Health Care Insurance..........18
Legacy Costs and the Issue of Moral Hazard........................18
List of Tables
Table 1: Automotive Parts Industry Plants and Employment................5

Comparing Automotive and Steel Industry
Legacy Cost Issues
Many congressional offices have expressed concerns regarding the October

2005 bankruptcy filing by Delphi Corporation, a major automotive parts supplier,

especially regarding the impact on retirees. Adding to these concerns are the
continuing high costs and competitive impact of pension and health care benefits paid
by the three large U.S.-origin manufacturers of motor vehicles, the “Big Three” of
General Motors (GM), Ford, and the Chrysler Group of DaimlerChrysler. These
costs have contributed to a large global 2005 financial loss for GM, and a large net
annual loss for Ford in its North American automotive manufacturing operations.
Only Chrysler, the smallest of the Big Three, managed to earn a profit in North
The recent experience of the steel industry with respect to pension and health
care legacy costs may influence the ongoing developments in the automotive sector.
“Legacy costs” is the common term for worker pension and health care benefits that
were negotiated in past collective bargaining agreements. The issue of legacy costs
was a major factor in the restructuring of the U.S. steel industry.1 The automotive
industry is the largest sectoral customer of the steel industry in North America. One
commentator has suggested, for example, “ ... as [the major unionized automotive
manufacturers] take aim at ‘legacy costs’ ... [t]he gyrations of the steel industry
provide a road map of how they might reconfigure their industrial relations.”2
The Automotive Industry Seeks to Reduce Legacy
The largest U.S.-based automotive parts manufacturer, Delphi Corporation, on
October 8, 2005, filed for reorganization under Chapter 11 of the U.S. bankruptcy
code. Delphi was spun off from General Motors (GM) in 1999. It includes a wide
range of parts-making operations in the United States and abroad, although the
foreign units are not included in the bankruptcy filing. The U.S. operations of Delphi
employ about 33,000 unionized hourly workers. Robert S. (“Steve”) Miller, the
newly appointed CEO of Delphi, has stated that the package of pay and benefits for

1 For a summary, see CRS Report RL31748, The American Steel Industry: A Changing
Profile, by Stephen Cooney.
2 Eduardo Porter, “Reinventing the Mill: Can Steel Makers Provide a Road Map for Other
Ailing Industry Giants?” New York Times (Oct. 2, 2005).

unionized production employees, which he calculated at the time of the bankruptcy
filing as worth about $65 per hour, cannot be maintained if the company is to remain
On October 17, 2005, GM announced that it had reached an agreement in
principle with the United Auto Workers union (UAW) to reduce its health care bill
by about $1 billion annually. Under the deal, workers and retirees, who are receiving
health care benefits from the company as negotiated in contract bargaining, would
henceforth pay a larger share, capped at about $750 per year, of their health care
costs. Current employees also will give up a $1-per-hour wage increase agreed for
2006 (about $2,000 annually per worker) to help fund the company health care
program.4 The agreement has been ratified by a 61% affirmative vote of current
active UAW workers, an endorsement considered “tepid” by some observers.5 At the
same time, GM announced a cumulative annual loss of $4.2 billion for the first three
quarters of 2005 in its North American automotive operations.
Since then, GM has announced a $10.6 billion loss for the full year of 2005.
This loss includes $5.5 billion set aside to meet obligations undertaken by GM to
UAW and other union-represented hourly wage workers when Delphi was spun off.6
GM reassured these workers, whom it formerly employed, that it would be
responsible for their pension and health care benefits, should Delphi be unable to
meet these obligations. GM has also indicated a plan to return to profitability that
includes closing four assembly plants and a total of nine manufacturing facilities,
while reducing its U.S. and Canadian workforce by 30,000 hourly workers.7 After
further discussions with the UAW, GM also made a three-stage buyout offer to all
U.S. hourly employees, in an effort to achieve desired levels of employment
!For all employees now eligible for retirement with 30 or more years
of service, a $35,000 buyout offer, plus full pension and retiree
health care benefits (a reduced offer is available for employees
within a few years of reaching retirement with full benefits);

3 Delphi Corp., “Delphi Corp. Files Voluntary Ch. 11 Business Reorganization Cases to
Execute Transformation Plan and Address Legacy Issues and High-Cost Structure in the
U.S.,” news release (Oct. 8, 2005), pp. 2-3.
4 Wall St. Journal, “GM, Amid Industry Overhaul, Cuts Health Benefits for Retirees” (Oct.

18, 2005), p. A1; Washington Post, “GM’s UAW Retirees Face Health Care Costs” (Oct.

21, 2005), p. D1; Detroit News, “Black October: How One Month Changed the Course of
the Auto Industry,” pt. 2 (Nov. 13, 2005).
5 Detroit Free Press, “UAW Grants Tepid Support to Sharing GM Health Costs;” and,
Detroit News, “GM Workers to Agree to Pay More Toward Health Care” (Nov. 12, 2005).
6 GM’s loss for 2005 was initially announced as $8.6 billion. But it was restated as $2
billion higher after the company raised its estimate of the cost of its obligations for Delphi;
Detroit Free Press, “GM Adds $2 billion to Losses” (Mar. 17, 2006).
7 Wall St. Journal, “GM Cuts Deeper, Targets 30,000 Jobs” (Nov. 22, 2005); Detroit News
AutoInsider, “Closures Extend Beyond Michigan” (Nov. 22, 2005).

!For employees with at least ten years of employment, a $140,000
buyout offer, plus vested pension benefits frozen at present levels,
and without any health care benefits;
!For employees with less than ten years’ service, a $70,000 buyout
offer, with same GM obligations as above.
The GM-UAW negotiations on buyouts also included reference to continuing
GM obligations toward its former hourly employees who now work for Delphi.
GM’s offer included a buyout of up to 13,000 long-term Delphi employees on the
same terms as current GM workers, and an offer to accept up to 5,000 Delphi
employees who could “flow back” to jobs at GM.8
Since its declaration of bankruptcy, Delphi has made several offers for amended
collective bargaining agreements, all of which involved substantial reductions in the
base rates for hourly wages and curtailment of company-paid benefits. Failing
agreement on revised contract terms, Delphi indicated that it would seek permission
from the bankruptcy judge to cancel its union contracts. The two principal unions
who represent Delphi workers, the UAW and the International Union of Electrical
and Electronic Workers (known as IUE-CWA since its merger with the
Communications Workers of America), found all the offers from Delphi as too
objectionable even to be presented to their members (base hourly wage rates would
be reduced from $27 per hour to $16.50 under Delphi’s last offer, plus there would
be reductions in other benefits).9 Consequently Delphi on March 31, 2006, requested
that the bankruptcy court allow them to cancel the contracts.10 The unions have
threatened to strike if Delphi takes such action, and many analysts believe that as GM
buys about half the value of Delphi’s annual output of $28 billion, a long-term strike
at Delphi could well force GM to suspend manufacturing operations and go into
bankruptcy itself.11

8 UAW-GM-Delphi. “Special Attrition Program: Framework Agreement” (Mar. 23, 2006);
Wall St. Journal, GM Makes Sweeping Buyout Offer” (Mar. 23, 2006), p. A1; Washington
Post, “Historic Deal Will Pare Down GM” (Mar. 23, 2006), p. A1 and “What’s Being
Offered,” p. A8.
9 Wall St. Journal, “Delphi Unions Reject Wage-and-Benefit Proposal” (Mar. 29, 2006), p.
A9;, “Delphi Pay-Cut Deadline ‘Ludicrous’” (Mar. 29, 2006);
“UAW: New Delphi Offer a No-Go” (Mar. 29, 2006); Washington Post, “Unions Denounce
Delphi Offer” (Mar. 30, 2006), p. D3.
10 Delphi Corp. “Delphi Outlines Transformation Plan,” news release (Mar. 31, 2006). The
full plan outlined by Delphi to the bankruptcy court included designating only eight of its
29 U.S. plants as “core” operations, with the remainder to be sold or closed. Washington
Post, “Delphi Asks Judge to Cancel Labor Contracts” (Apr. 1, 2006), p. D1.
11 Wall St. Journal, “Showdown on Auto-Labor Costs Looms as Delphi Goes to Court”
(Mar. 31, 2006), p. A1. This article quotes Delphi CEO Steve Miller as telling GM CEO G.
Richard Wagoner, “A strike will be bad for us, but it will kill you.” See, for opinions on
Delphi strike, Doron Levin, “Delphi, UAW and GM Have Fingers on Doomsday Button,” (Apr. 3, 2006); and Tom Walsh, “Disastrous Strike Can Be Avoided,”
Detroit Free Press (Mar. 31, 2006).

A parallel series of developments has affected Ford and its former parts-making
operation, Visteon Corporation, which it spun off in 2000. A few months before the
Delphi bankruptcy, Visteon reached agreement with Ford for the former parent to
take back about half of Visteon’s U.S. plants and almost all of its 18,000 UAW-
organized workers. Visteon, which had been the second-largest U.S.-based auto parts
manufacturing operation, has become a much smaller company, with most of its
industrial labor outside the United States. Ford has announced that it intends to sell
or close the two dozen Visteon plants that it has reacquired.12 Like GM, Ford is
losing money and market share in its U.S. market automotive operations. It reported
a $1.6 billion loss for 2005 in North America, and announced plans to shut as many
as 14 plants and reduce its workforce by as many as 34,000 jobs.13
Under the industry practice of “pattern bargaining,” both Chrysler and Ford
sought health care cost adjustments similar to those at GM in their labor contracts.14
The deal with Ford was approved even more narrowly than at GM by a 51% vote
among current UAW members.15 No revised health care deal has yet been announced
by the UAW and Chrysler.
Over the course of the past two years, a number of other automotive parts
manufacturing companies also have entered Chapter 11 bankruptcy, including union-
organized plants. Many of these companies have been squeezed between rising
prices for raw materials (especially steel and plastic resins), continuing pressure from
Big Three customers on product price, and declining demand as Ford and GM have
lost market shares and cut back production. Delphi, with $28 billion in annual sales
in 2004 (and only just overtaken by Bosch as the world’s largest automotive parts
supplier) ranks as the largest bankruptcy of a manufacturing company in history.16
But besides Delphi, major auto parts companies that have entered Chapter 11
reorganization in recent years include Dana ($9 billion in 2004 original equipment
sales), Collins & Aikman ($3.9 billion), Federal-Mogul ($3.4 billion), Tower
Automotive ($3.2 billion), and Oxford Automotive, a major U.S.-based supplier,
which since has been broken up.17

12 Automotive News, “Ford Studies Chrysler’s Operation Divestitures” (Oct. 10, 2005), p.

18; and, “Visteon Seeks Lower Wages by Moving Jobs Out of U.S.” (Oct. 17, 2005), p. 16.

The latter article calculates that “Visteon’s average North American wage and benefit
structure went from $38 to $17.”
13 Wall St. Journal, “”Ford Will Shed 28% of Workers in North America” (Jan. 24, 2006),
p. A1.
14 Detroit Free Press, “UAW, Ford Discuss Health Care” (Nov. 17, 2005); Detroit News,
“UAW, Chrysler to Start Talks Over Health Care” (Nov. 23, 2005).
15 Wall St. Journal, “”Ford Concessions Passed by UAW, But Vote is Close” (Dec. 23,

2005), p. A3; Detroit News AutosInsider, “Health Giveback Ekes By at Ford” (Dec. 23,


16 Detroit Free Press, “Labor Costs Sink Delphi” (Nov. 10, 2005).
17 A description of the U.S. automotive supplier industry and its competitive situation is in
CRS Report RL32883, U.S. Automotive Industry: Policy Overview and Recent History, by
Stephen Cooney and Brent D. Yacobucci.

Auto parts manufacturers employ many more people in the United States than
the “nameplate” manufacturers. In 2005, there were 678,000 persons employed in
manufacturing parts, versus 212,500 in producing automobiles and light trucks. The
economic difficulties of the two largest U.S. motor vehicle producers, though offset
to some extent by gains in U.S. employment by foreign-owned manufacturers, have
already had wide ripple effects in U.S. industrial employment. Between 2000 and

2005, while employment in motor vehicle manufacturing declined by 25,000 jobs,

employment in parts manufacturing decreased by 162,000.18 To indicate the major
impact of parts suppliers on the national and local economies, Table 1 lists the
number of automotive parts plants and total employment for each state (latest state
data are available only for 2004).
Table 1: Automotive Parts Industry Plants and Employment
(NAICS 3363, 2004 data)
P l ants Employees P l ants Employees
Alabama12313,042 Montana1398
Alaska 1ND Nebraska354,458
Arizona833,387 Nevada32775
Arkansas 687,150 New Hampshire151,272
California69221,248 New Jersey661,582
Colorado721,263 New Mexico1690
Connecticut 595,060 New York21825,466
Delaware12611 North Carolina16718,215
Florida1795,819 North Dakota19862
Georgia17211,372 Ohio57894,075
Hawaii4ND Oklahoma784,819
Idaho11298 Oregon782,241
Illinois30729,113 Pennsylvania1399,885
Indiana37577,405 Rhode Island9ND
Iowa 699,443 South Carolina11018,887
Kansas453,593 South Dakota14673
Kentucky17030,962 Tennessee22336,660
Louisiana391,429 Texas31615,488
Maine11493 Utah515,413
Maryland402,165 Vermont10ND
Massachusetts371,747 Virginia938,819
Michigan1,032168,955 Washington872,255
Minnesota933,165 West Virginia122,164
Mississippi887,331 Wisconsin12013,456
Missouri18816,862 Wyoming1193
U.S. TOTAL*6,476690,527
ND: Non-disclosable, because of data inadequacy or company confidentiality.
*U.S. totals may not equal sum of state totals due to non-disclosable data, data not attributed to
specific states, and rounding in calculating annual average total.
Source: U.S. Dept. of Labor. Bureau of Labor Statistics.Quarterly Census of Employment and

18 Data from U.S. Dept. of Labor. Bureau of Labor Statistics Data (

Some Members of Congress have become increasingly concerned that these
developments presage termination by the domestic motor vehicle manufacturing
industry of responsibilities for legacy costs under collective bargaining agreements.
A number of commentators have drawn attention to parallels with industries such as
airlines and steel, particularly the latter, in which management has used the
bankruptcy process in order to shed legacy costs, and to force unions to accept
streamlined and downsized workforces.19 Pension liabilities that were formerly the
responsibility of these private sector companies have been taken over by the Pension
Benefit Guaranty Corporation (PBGC), an entity chartered by Congress that insures
qualifying private sector pension funds. PBGC calculates that as of the end of its
2005 fiscal year, its net deficit of liabilities over assets was approximately $23
billion, and that the total underfunding of all insured private sector pension plans was
$450 billion.20 Moreover, the maximum pension benefits insured by PBGC are
frequently less generous than the benefits guaranteed in the corporate plans that
PBGC takes over. From the retirees’ point of view, that is still better than the case
for private health care plans, for which there is no similar federal guarantee. Plan
participants have essentially lost such coverage in bankruptcies, though they may
receive assistance if their coverage is from prefunded health care plans (see below).
Retirees may also qualify for partial federal reimbursement of coverage under a
qualified plan through the tax code.21
Comparing Steel and Automotive Legacy Costs
The ratio of retirees to active workers was much higher in the steel industry at
the peak of its financial distress after 2000 than it is in the automotive industry today,
in terms of numbers of individuals affected by loss of or changes in coverage caused
by companies’ economic circumstances. The bankruptcies of three of the largest
integrated U.S. steelmaking companies (Bethlehem, LTV and National Steel) in
2001-03 led to the loss of corporate pensions and health care coverage of about
200,000 retirees, compared to about 30,000 active employees at those three
companies. Leo Gerard, president of the United Steelworkers union, estimated that
a total of about 600,000 retirees received retiree benefits and health care through
contracts reached in collective bargaining agreements in the steel industry. By

19 For example, see Mark Reutter, “Workplace Tremors,” Washington Post (Oct. 23, 2005),
p. B1. Steve Miller himself, then-CEO of Bethlehem Steel, took that company into
bankruptcy, through which it shed its retiree pensions in the largest single PBGC takeover
of a steel industry plan. Miller has stressed, however, that no decision will be made by the
company as to whether Delphi will terminate its pension plans for at least a few months;
Wall St. Journal, “Reassembling Delphi” (Oct. 17, 2005), p. B1.
20 PBGC. “PBGC Releases Fiscal year 2005 Financial Results,” press release 06-06 (Nov.

15, 2005).

21 Details of the health care assistance for recipients of pensions from PBGC are in CRS
Report RL31593, Health Insurance for Displaced Workers, by Julie Stone et al; and CRS
Report RL32620, Health Coverage Tax Credit Authorized by the Trade Act, by Julie Stoneth
and Bob Lyke. S. 329 has been introduced in the 109 Congress by Sens. Rockefeller and
Leahy to provide all retiree beneficiaries with health care coverage with a secured claim
under chapter 11 of the bankruptcy code.

comparison, after declining by 50,000 over ten years, the total number of
steelworkers at integrated works and minimills was less than 125,000 in 2002.22
The automotive industry as a whole has not seen such a decline in employment.
Total employment in the industry, including the manufacture of parts and
components, plus heavy trucks and bodies, was more than one million in 1990, and
was still more than a million in 2005.23 However, the structure of that employment
has changed. The “de-integration” of the traditional Big Three automotive
manufacturers (GM, Ford and Chrysler) meant that those companies shed more than
600,000 jobs after 1980. Some of those jobs were transferred to GM and Ford’s
spun-off parts makers, principally Delphi and Visteon.24
As a consequence of this reduction of direct employment by the Big Three, they
are moving in the same direction as the steel industry. They now provide pension
and health care benefits determined by defined benefit contracts negotiated through
collective bargaining and support a base of retirees and dependents that outnumbers
the remaining active employees. GM by 2004 employed less than 180,000 in its U.S.
automotive operations; Ford about 110,000; and, the Chrysler Group about 80,000
— a total of 370,000 active Big Three employees. The Automotive Trade Policy
Council (ATPC), a joint Big Three representative organization, calculated in 2004
that its members supported more than 800,000 retirees. Thus, the total potential
claims of automotive industry pension funds on PBGC would be much greater than
all the liabilities PBGC has assumed to date.
ATPC also calculated that its member companies spent approximately $10
billion annually on employee and retiree health care, more than half of that by GM
alone. In a widely publicized statement, GM CEO G. Richard Wagoner has noted
that each of his company’s vehicles produced in North America includes an average
cost of $1,525 in health care benefits, and asserted that GM is the world’s largest
private provider of health care benefits.25
Delphi has a lower ratio of active employees to retirees than its former parent.
According to information from PBGC, 75,000 Delphi employees are in PBGC-
insured pension funds, including 13,000 retirees who have retired from Delphi since
it was created in 2000. PBGC has calculated the estimated “termination liability” of
the Delphi pension plan. Total liability would be $10.8 billion, of which $4.1 billion

22 CRS Report RL31748, The American Steel Industry: A Changing Profile, by Stephen
23 According to BLS North American Industry Classification Series 3361, 3362 and 3362
annual data, as viewed on [].
24 Employment trends in the U.S. automotive industry are discussed in detail in CRS Report
RL32883, U.S. Automotive Industry: Policy Overview and Recent History, by Stephen
Cooney and Brent D. Yacobucci.
25 The data in the preceding paragraphs are reported in CRS Report RL32883, U.S.
Automotive Industry: Policy Overview and Recent History, by Stephen Cooney and Brent
D. Yacobucci; the statistic from Richard Wagoner was initially quoted in “Health Care
Costs Burden GM by $4 Billion, CEO Says,” Detroit Free Press (Feb. 11, 2005).

would be the amount covered by PBGC.26 The responsibility for the balance, per
agreement between GM and the unions when Delphi was established, may revert to
GM, thus adding to GM’s own overall pension liability. This amount could include
some responsibility for Delphi retirees’ health care, currently and in the future.27
Although GM is not bankrupt and still has a strong cash balance position despite
recent losses, these responsibilities would add to its already considerable legacy cost
Delphi’s ability to bear the burden of high and ongoing legacy costs has been
considered by the company to be a key competitiveness issue from its very beginning.
For example, a 2005 Automotive News article quoted from Delphi’s original
prospectus of 1999:
A substantial portion of our cash flows from operations will be dedicated to meet
our pension funding obligations ... As a result of these [and certain other]
obligations, our liquidity position may be adversely affected if we fail to meet
our expected cash flow from operations.
While such disclaimers might be considered as routine in a corporate
prospectus, the article goes on to note that in this case it proved “prophetic.” In a
press conference on the bankruptcy filing, CEO Miller emphasized declining
revenue from its former parent GM’s declining light vehicle market share and
production volumes. He concluded:
The impact on Delphi has been to reduce revenues by several billion dollars a
year worth of parts. Given our high fixed costs and inflexible labor costs, the28
result has been devastating.
Thus, while the number of retirees directly affected in the Delphi filing does not
approach the levels seen in the steel industry bankruptcies after 2000, how legacy
cost issues for retirees and continuing employees are to be resolved is important both
in the development of a bankruptcy reorganization plan — either through collective
bargaining or through the judicial process. Furthermore, legacy costs affecting both
retirees and current employees will likely be an issue for the Big Three automotive
companies, particularly Ford and GM, arising from the former parts-making
affiliates’ pension and health care plans. In this respect, there are parallels between
the steel and automotive industries.

26 Data from CRS interviews with PBGC Deputy Director Vincent Snowbarger (Oct. 19-20,
2005), confirming liability estimates reported in “Bill to Boost U.S. Pension Agency Meets
Resistance by Businesses,” Wall St. Journal (Oct. 17, 2005), p. A2.
27 The shares of pension liability attributable to PBGC, GM and Delphi, in case of a
potential termination of the Delphi pension plan, and the conditions under which GM retains
liability for beneficiaries, are complex subjects and are still subject to litigation. See for
example, “Delphi’s Miller Rethinks Divisive Rhetoric,” Detroit News Auto Insider (Oct. 28,


28 Quotations from Richard Truett, “Delphi’s First Prospectus Foreshadowed Problems,”
Automotive News (Oct. 24, 2005), p. 17.

Competitive Splits in the Automotive and Steel
Both the steel industry and the automotive industries in the United States are
bifurcated in a manner that indicates sharply different perspectives on legacy cost
issues. The nature and sources of the bifurcation are different in the two cases,
however. The U.S. steel industry is divided between integrated steel mills, which
produce steel from iron ore and other inputs in basic oxygen furnaces, and minimills,
which produce steel primarily from remelted ferrous scrap in electric arc furnaces.
Each of the different technological sides of the industry presently produce about half
of the total U.S. annual production of about 110 million tons of steel output each
year. The minimills have been gaining share, however, and after 2000 overtook the
older integrated side of the industry as the main domestic producer of steel.
The minimills, led by Nucor, by far the largest of the minimill producers, tend
to be non-union operations, mostly located in states or regions that are not traditional
steel-producing areas, such as Arkansas and South Carolina. The integrated mills
today are concentrated in the Great Lakes region, particularly northwest Indiana, and
maintain production in Ohio, Pennsylvania, Michigan, Maryland, West Virginia and
downstate Illinois, across from St. Louis. Since Utah’s Geneva Steel shut down in
2002, no integrated steel mills are located west of the Mississippi River. All of the
integrated mills are organized by unions, primarily the United Steelworkers
(US W A). 29
This split parallels that in the automotive industry between the traditional Big
Three assembly plant operators, which in the 1950s produced virtually all of the
volume car production in the United States, and the internationally based operators,
which began building plants in the United States, after U.S. political and diplomatic
pressure led Japanese companies to begin doing so in the early 1980s.30 The Big
Three assembly plants, and concomitantly their affiliated and unaffiliated supplier
operations, not coincidentally are concentrated in the same part of the country as the
integrated steel mills, a so-called “auto belt” of midwestern states around the Great
Lakes. All Big Three assembly plants, spun-off and formerly affiliated supplier
operations, and many independent parts plants in this region are represented by
organized labor.
By contrast, the major Japanese-owned manufacturers, later joined by German
and Korean companies, have opened their U.S. assembly plants in the South, with the
notable exceptions of two Honda assembly plants in Ohio, a Toyota plant in

29 CRS Report RL31748, The American Steel Industry: A Changing Profile, by Stephen
30 In the 1970s Volkswagen was the first foreign-owned company to begin volume
production in the United States, but has since closed its U.S. manufacturing operation.
Honda also started manufacturing motorcycles here in 1979, before it later began producing
cars at the same location in Ohio. On the establishment of the so-called “transplants,” see
CRS Report RL32883, U.S. Automotive Industry: Policy Overview and Recent History, by
Stephen Cooney and Brent D. Yacobucci.

southwest Indiana, and an early Toyota-GM joint venture plant in California.
Virtually none of the internationally owned assembly plants are union-organized.31
Many of their suppliers are also foreign investors in the United States. Some are
affiliated companies that have invested in the United States, such as Denso and Aisin
Seiki, both controlled by Toyota and part of its keiretsu. Others are independent
companies (such as Robert Bosch, Faurecia and Siemens VDO). Many of these
operations are also southern-based and non-union.32
The preference by foreign companies for locations outside the traditional auto
belt is shifting the geographical focus of the auto parts industry. While noting that
it remains centered in the Midwest, economist Thomas Klier of the Federal Reserve
Bank of Chicago calculates that the location of new assembly plants in the South has
tended to shift the supplier industry also in that direction — for both the Big Three
and the foreign-owned companies. For example, his model posits that if GM had
located its new Saturn assembly plant in Michigan, instead of Spring Hill, Tennessee,
there would have been 42 more supplier plants located in the Michigan-Indiana-Ohio
auto belt and 37 fewer such plants in Tennessee and neighboring southern states.
Similarly, if BMW had located its new plant in Michigan instead of near
Spartanburg, South Carolina, about two dozen new supplier plants would have
opened in the three auto belt states, Klier calculates, instead of states in the South.33
While the division in the structure of the steel industry is based on technology,
all the automotive manufacturers are essentially producing the same type of products
(passenger cars and light trucks) in the same way — assembly line methods, using
parts and components brought in by truck from more or less remote locations. The
key differences between the two sides of the domestic U.S. automotive industry can
be summarized as:
!Ownership. The automotive industry, unlike the steel industry, is
split between the traditional Big Three, all of which have their roots
as U.S. companies, and the foreign-based manufacturers, all of
which started by exporting cars to the United States, and which
continue to supply about half their sales through imports.34 This
difference remains significant notwithstanding the fact that one of
the Big Three, the Chrysler Group, is now owned by a German
parent company, DaimlerChrysler AG. The Chrysler Group still is

31 The exceptions prove the rule, in that they were all built or operated as joint ventures with
Big Three companies (GM-Toyota in Fremont, CA; Ford-Mazda in Flat Rock, MI; Chrysler-
Mitsubishi in Normal, IL). For details on plant location and unionization, see ibid., pp. 29-


32 Both the Big Three and the international companies also have a number of assembly
plants in Canada and Mexico, which are now integrated with U.S. operations. The Japanese-
owned plants in Canada are non-union.
33 Thomas Klier, “Determinants of Supplier Plant Location: Evidence from the Auto
Industry,” Federal Reserve Bank of Chicago Economic Perspectives (3rd Qtr. 2005), pp. 10-


34 CRS Report RL32883, U.S. Automotive Industry: Policy Overview and Recent History,
by Stephen Cooney and Brent D. Yacobucci, Fig. 9.

operated like a traditional Big Three company, with labor relations
governed by contracts reached in collective bargaining. Both the
largest integrated steel company operating in the United States
(Mittal Steel) and the second-largest minimill operator (Gerdau
Ameristeel) are foreign-owned, but this is a recent development, and
the location of ownership appears to have played no systematic role
in the policy perspectives of the two sides of the industry.35
!Labor relations. As noted above, all of the Big Three operations
and many of their suppliers are unionized. The international
automotive manufacturers and many of their suppliers are not. This
difference does parallel an important distinction between the
unionized integrated steel mills, and the generally non-union
!Geographical focus. The Big Three and their suppliers are
concentrated in the industrial Midwest (and neighboring Ontario).
In part, this is because plant closures have been a subject of
collective bargaining, and also because most suppliers to an
assembly plant are now located within about 400 miles (one day’s
truck drive by interstate highway) of the plant.36 Similarly, the
integrated steel industry is now mostly located in states surrounding
the Great Lakes, while the minimill side of the industry is spread
more widely around the country (it has been suggested that minimills
should be called “market mills,” because they can be located
anywhere near the ultimate consumer).
!Product focus. The steel industry is increasingly divided on a
product basis, with the integrated mills focused largely on high-
quality sheet products, especially as used in automotive products and
appliances, and the minimills focused more on “long” products,
especially those used in construction, mineral exploration and
development, and specialized industrial activities. In contrast, both
the Big Three and the foreign-based auto manufacturers now
produce across the full range of light vehicles sold in the American
market, from passenger cars to minivans, sports utility vehicles, and
pickup trucks. However, foreign-based manufacturers initially
gained entree into the U.S. market through a reputation for
producing small, fuel-efficient cars (Japanese and Korean

35 For example, Mittal Steel recently supported maintaining antidumping duties on steel
plate imports from six other countries in an ITC “sunset review” case; American Metal
Market, “Mittal, Lawmakers Tell ITC: Keep Duties” (Oct. 3, 2005 print ed.), p. 2; and,
Mittal and Gerdau joined three other domestic producers initiating an antidumping suit
against imported wire rod; ibid., “U.S. Wire Rod Makers Rap Imports from 3 Nations”
(Nov. 14, 2005), p. 1.
36 See the data on this issue developed by Thomas Klier, as summarized in CRS Report
RL32883, U.S. Automotive Industry: Policy Overview and Recent History, by Stephen
Cooney and Brent D. Yacobucci.

manufacturers) or for producing luxury products (especially
Mercedes Benz and BMW). They now outsell the Big Three in
these products, while the Big Three still dominate in sales of SUVs
and other truck-based vehicles. This difference, while it has
seriously affected relative market performance, has not so far led to
radically different positions within the automotive industry on fuel
economy policy issues.
In summary, the key issue within the steel industry that may provide an
instructive parallel to the policy perspectives within the automotive industry is the
division based on labor relations and to some extent geographical diversity. The Big
Three, including many of their suppliers, and integrated steel mill companies have
unionized workforces, based largely in the industrial Midwest. Newer competitors,
the steel minimills and foreign-owned automotive manufacturers, are largely non-
union, focused on “flexible” manufacturing approaches, and with production
locations in states spread around the country. But, whereas the automotive industry
is split between the traditional Big Three manufacturers, all domestic in origin, and
foreign-based companies, foreign and domestic companies are on both sides of the
division in the steel industry between integrated producers and the minimills.
Seeking Consensus on Legacy Costs: Lessons
from the Steel Industry
The American steel industry in 2001-03 succeeded in reaching a consensus on
how to deal with the economic threat posed by rising imports during a period of
domestic overcapacity and low demand. While a policy consensus was never
absolute, integrated steel mill companies, minimill operators and unions together
asked for trade remedies under Section 201 of the 1974 Trade Act. Representatives
of these parties testified in favor of trade remedy action under this law before the
U.S. International Trade Commission (ITC), had support from some Members of
Congress in the process, and successfully lobbied for executive action.37
There was no such unity within the steel industry on the issue of legacy costs.
As imports increased and the domestic steel industry foundered financially after
1998, the USWA supported comprehensive legislation, known as the “Steel
Revitalization Act” (H.R. 808 in the 107th Congress). This bill, among other
proposed measures, would have created government-managed health care and
pension systems, financed by a tonnage surcharge on all steel sold in the United
States (domestically produced or imported). The measure would have relieved the
domestic integrated mills of legacy costs. But the measure was never endorsed by
the American Iron and Steel Institute, representing both integrated producers and
minimills. It was opposed by the Steel Manufacturers Association (SMA),

37 Archived CRS Report RL31842, Steel: Section 201 Safeguard Action and International
Negotiations, by Stephen Cooney (available from author), examines in detail the
development of U.S. policy on steel trade under the safeguard trade remedy process.
Termination of the safeguard remedies is discussed in CRS Report RL32333, Steel: Price
and Availability Issues, by Stephen Cooney

representing minimills, as a “government bailout” of the integrated steel mills. The
SMA did not oppose assistance for retirees, unless such assistance was part of a
package that might allow troubled integrated mills to continue operating. Less
comprehensive legacy cost relief bills also failed to gain consensus support across
industry. A petition to discharge H.R. 808 from committee and bring it to the House
floor also failed to gain the necessary support of a majority of House members.38
In 1999 Congress approved the Emergency Steel Loan Guarantee Program (P.L.
106-51). Loans guaranteed under this program could be used to bolster pension
funds and pay health care costs. But, in practice, the Steel Loan Guarantee program
did not play a major role in alleviating financial difficulties in the steel industry. In
total, three loan guarantees were taken up, primarily by two of the smaller integrated
producers, Geneva Steel and Wheeling-Pittsburgh. One of the beneficiaries, Geneva,
nevertheless ceased operations and was liquidated. The program was extended and
modified in later legislation, but efforts were not successful to increase the use of
guarantees by liberalizing the conditions under which they are authorized. Such
efforts were generally opposed by the SMA.39
Congressional action to provide relief beyond PBGC pension plan takeovers,
in response to loss of benefits by steel industry retirees, consisted of a measure added
to the Trade Act of 2002 (P.L. 107-210). This provides a health coverage tax credit
(HCTC) equal to 65% of the cost of the premium for participating in a “qualified”
health care plan, available to persons who receive their pension from the PBGC, or
others who receive Trade Adjustment Act Assistance.40 A study by a private research
body suggests that about 22% of eligible persons may actually be receiving the
HCTC, not counting people who are disqualified because they have Medicare or
other coverage, such as through their spouse.41 Regardless of whether they are
eligible for the HCTC, retirees who lose their health insurance also lose employer-
paid prescription drug benefits that often are more generous than any alternative
coverage they can acquire, including the new Medicare prescription drug benefit that
started in 2006.
The lesson that may be drawn from this history for those concerned with legacy
costs in the automotive industry is that a unified industry position on any plan will
likely be necessary to resolve this issue, if the industry is to seek any government
guarantees or assistance. This means, initially, the full support of the Big Three, the
UAW and other unions. It may also mean the acquiescence, if not the active support,
of the foreign-owned manufacturers in the United States and their representative

38 Details of these legislative proposals and positions are discussed in Archived CRS Report
RL31279, Steel: Legacy Cost Issue, by Stephen Cooney (available from author).
39 The most recent CRS summary of the Emergency Steel Loan Guarantee program is in
CRS Report RL31748, The American Steel Industry: A Changing Profile, by Stephen
40 Ibid. For details on how this program operates, see CRS Report RL32620, Health
Coverage Tax Credit Authorized by the Trade Act, by Julie Stone and Bob Lyke.
41 Ibid., pp. 11-12; Economic and Social Research Institute, “Limited Take-Up of Health
Coverage Tax Credits and the Design of Future Tax Credits for the Uninsured,” esp. pp. 2-5.

organizations. Historically, these companies and organizations have been the targets
of regulations and legislation, such as import quotas and origin labeling
requirements, that were advocated by U.S. unions and the Big Three.42 But now a
quarter or more of all U.S. workers in the motor vehicle and automotive parts
industry (not counting employees of Chrysler) work for foreign-owned companies.43
Many of these jobs are located in states outside the traditional auto belt and are
critical to those states’ economies. Furthermore, the spread of automotive plants to
these states suggests that generating a congressional consensus on how to deal with
the legacy cost issue may be difficult. As seen with the issue of steel legacy costs,
an approach to the automotive legacy issue that does not address the different
perspectives of all parts of the automotive manufacturing industry, as it presently
exists today in the United States, is unlikely to succeed.
Congressional Options on Automotive Legacy
As mentioned above, in the late 1970s and early 1980s, the Big Three and the
UAW sought to gain relief from the rising competitive force of imports through a
number of legislative and regulatory policy actions. These included an unsuccessful
effort to win safeguard trade relief, a congressionally approved loan guarantee that
helped save Chrysler Corporation from bankruptcy, and a voluntary restriction on
cars exported to the United States from Japan. By the late 1980s, the Big Three were
again profitable, and the interest in such measures, mixing trade and industrial policy,
dissipated. In the 1990s, the Clinton Administration tried to force Japan to open its
automotive parts market, threatening to retaliate against Japanese luxury car exports
to the United States, and did achieve a Japanese commitment to alter certain
At the present time, there are no legislative proposals to assist the Big Three and
its parts suppliers through such trade remedies or other policies involving broad and
direct government intervention in the market. In September 2005 Ford CEO William
C. Ford, Jr. wrote President George Bush to suggest a meeting at which auto makers
and others interested in energy security could discuss how to develop initiatives to
find a solution to this issue. In a November 22, 2005, speech in Washington, DC,
Ford expanded on this topic by laying out a plan to enhance both domestic
automotive manufacturers competitiveness and improved fuel economy. Ford’s plan
!Urging Congress to increase the research and development tax credit
to more directly support companies working on advanced vehicles,
components, and fuel technologies;

42 CRS Report RL32883, U.S. Automotive Industry: Policy Overview and Recent History,
by Stephen Cooney and Brent D. Yacobucci.
43 Ibid., pp. 31-32.
44 This history is summarized in ibid., pp. 54-58.

!Urging Congress to consider tax incentives to help convert existing
— but outmoded — plants into “high-tech” facilities;
!Calling for investment in American workers who build advanced
technology products with training programs and incentives to
upgrade worker skills;
!Suggesting that by 2010, where feasible, governments at all levels
should purchase only hybrids or other alternatively fueled cars;
!Expanding infrastructure for ethanol fuels, by increasing the
available number of fueling stations;
!Requesting publicly that President Bush convene a group of
automakers, parts suppliers, fuel providers and government agencies
“to address America’s energy challenges.”45
One bill that links improving fuel economy with helping companies to pay for
retiree health care, S. 2045, was introduced by Senator Barack Obama on November
17, 2005. This bill would establish a program to pay 10% of domestic automobile
manufacturers’ retiree health care costs, if companies invested at least 50% of the
savings in development and production of vehicles using enhanced or innovative
fuel-saving or alternative fuel technologies. A range of other legislative proposals
now under consideration that may impact the automotive sector, including especially
fuel economy and environmental proposals that may have a competitive impact, are
discussed in an earlier CRS Report.46 Beyond these issues, Congress has recently
approved or is presently considering the following issues regarding pensions and
health care, which could have important consequences for automotive manufacturers.
Tax Deductions for Legacy Cost Contributions
Under current law, employers may claim income tax deductions for
contributions to qualified pension funds and for actual expenses incurred for health
care claims by employees and retirees. Employers may also claim a tax deduction
for contributions to collectively bargained trusts for unionized employees’ retiree
health care, known as Voluntary Employee Beneficiary Associations (VEBAs).47 In
2003, Congress passed the Medicare Prescription Drug, Improvement, and
Modernization Act, which subsidizes companies that maintain or establish
prescription drug benefit coverage for employees and retirees, and excluded this

45 Summary from Ford press release, “Bill Ford: Through Innovation, America Can Address
Energy, Manufacturing Challenges” (Nov. 22, 2005), and text of Ford’s speech to National
Press Club, Washington, DC (Nov. 22, 2005), as provided by Ford Motor Co. Also, letter
from Bill Ford to President George W. Bush (Sept. 22, 2005).
46 CRS Report RL32883, U.S. Automotive Industry: Policy Overview and Recent History,
by Stephen Cooney and Brent D. Yacobucci.
47 A description of VEBAs and their restrictions under U.S. tax law, as prepared by CRS,
is in U.S. Senate. Committee on the Budget. Tax Expenditures: Compendium of Background
Material on Individual Provisions (S.Prt. 108-54, Dec. 2004), pp. 479-86.

subsidy from calculation of gross income.48 In the case of bankrupt steel companies,
VEBAs proved inadequate to cover fully retiree health care costs, and they may also
be inadequate in the automotive industry. Moreover, tax deductions for actual health
care cost claims, and VEBA and pension fund contributions may not be helpful for
companies that are losing money.
PBGC Reform
The 109th Congress has studied the rapidly rising burdens on PBGC occasioned
by the takeover of pension plans of bankrupt companies, especially among airlines
and in the steel industry.49 The House approved on December 15, 2005, by a vote of
294-132, a comprehensive PBGC reform measure, H.R. 2830, which would raise
premiums, tighten funding requirements of insured pension plans and change the
bases for calculating funding adequacy. The UAW initially opposed this measure.
It changed its position when the principal sponsor and then-chairman of the
Education and Workforce Committee, Representative John Boehner, and
Representative Bill Thomas, chairman of the Ways and Means Committee, agreed
to changes in the bill that would continue to allow early retirement and shutdown
benefits to be paid out of pension funds. The bill was also amended to allow
companies to continue to take tax credits for pension fund contributions ahead of
schedule. 50
The Senate on November 16, 2005, approved S. 1783, co-sponsored by the
respective chairmen and ranking members of the Finance and Health, Education,
Labor and Pensions (HELP) Committees on a vote of 97-2.51 Concerns have been
raised regarding this bill by Ford and GM, as well as by the UAW, who state that
some provisions will put even more pressure on companies or plans that are already

48 CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, by Jennifer O’Sullivan et al.
49 The 108th Congress had approved, and President Bush signed into law, a measure that
included two years of pension fund contribution relief to airline and steel companies (P.L.


50 H.R. 2830 and other proposed legislation are analyzed in CRS Report RL32991, Defined
Benefit Pension Reform for Single-Employer Plans, by Neela K. Ranade and Paul Graney.
On the UAW position and amendments to the bill, see also, House Education and Workforce
Committee News Updates, “Boehner, Thomas Announce Agreement with United Auto
Workers on Key Pension Reforms” (Dec. 13, 2005), and, “With Strong Bipartisan Vote,
House Backs Comprehensive Pension Reform Measure” (Dec. 15, 2005); Detroit Free
Press, “UAW Says It Will Support U.S. House Pension Bill” (Dec. 14, 2005), and, “Pension
Bill May Pinch Carmakers” (Dec. 16, 2005); Bureau of National Affairs, Daily Report for
Executives, “House Passes Pension Overhaul Bill, Clearing Way for Conference in 2006”
(Dec. 16, 2005, pp. GG-1; Washington Post, “House Passes Bill to Shore Up Pensions”
(Dec. 16, 2005), p. A3.
51 Washington Post, “Senate Passes Bill to Require Full Funding of Private Pensions” (Nov.
17, 2005), p. D1; Wall Street Journal, “Pension Measure Passes in Senate, But Hurdles
Loom” (Nov. 17, 2005), p. A5.

losing money.52 Also, narrower provisions have been added to each chamber’s
deficit reduction and budget reconciliation bill (S. 1932 §8201, as approved in
December 2005). These measures would establish higher premiums and require that
any company that reorganizes under Chapter 11 bankruptcy, and thereby terminates
its insured pension plan, pay PBGC $1,250 per insured employee for three years.53
Reducing Health Care Costs
By the Medicare Modernization Act of 2003 referenced above, Congress
required the Secretary of Health and Human Services to adopt electronic prescription
standards and improve electronic exchange of health care data. President Bush has
called for adoption of interoperable electronic health records within 10 years.54 A
number of bills have been introduced in the 109th Congress to increase federal
investment and leadership in health care information technology. On July 27, 2005,
the Senate HELP Committee reported S. 1418, the Wired for Health Care Quality
Act, co-sponsored by its chairman and ranking member, Senators Enzi and Kennedy.
Similarly, Congress is considering basing a portion of providers’ payments under
Medicare on the quality of care, a system known as “pay for performance.”55 Pay for
performance initiatives are also being undertaken by the private sector, with the
support of automotive companies.56 Whether any of these initiatives actually would
reduce costs remains to be seen.

52 Harry Stoffer, “Pension Reforms Would Cost the Auto Industry,” Automotive News (Oct.

24, 2005), p. 4; Jeff Plungis, “Big 3 Fear Pension Reforms,” Detroit News (Oct. 31, 2005).

The National Association of Manufacturers (Oct. 3, 2005) and the Business Roundtable
(Oct. 5, 2005), of which the Big Three are members, and the UAW (Nov. 14, 2005) all wrote
the Senate expressing concerns regarding S. 1783, which would require pension plan
sponsors to increase contributions when credit ratings fall and limit the “smoothing” of
pension plan earnings to a twelve-month period. Senators DeWine and Mikulski reportedly
put a hold on this legislation, but lifted it after receiving assurances that these issues would
be worked out in conference with the House (CQ Today, Nov. 15, 2005, p. 13; Wall St.
Journal, loc. cit.).
53 For a comparison of these measures, see CRS Report RS22315, Budget Reconciliation
and the PBGC, by Neela K. Ranade. Note that the bankruptcy provision apparently would
not apply to Delphi, as both bills exclude filings before the bankruptcy law changed on Oct.

17, 2005.

54 He has appointed Dr. David Brailer as National Coordinator for Health Information
Technology to help promote this cause; “This Man Wants to Heal Health Care,” Business
Week (Oct. 31, 2005), pp. 75-80. Note, however, that there are also costs associated with
implementing such a broad “Health Care IT” program.
55 CRS Report RL32837, Science and Technology Policy: Issues for the 109th Congress, by
Marcia S. Smith.
56 The two largest employer groups paying bonuses to providers of high-quality health care
are the “Leapfrog Group,” which focuses on hospitals, and “Bridges to Excellence,” which
focuses on physicians. GM and Ford are members of both organizations.

Expanding Medicare and Government Health Care Insurance
Another approach is to allow those not yet eligible for Medicare to “buy in” to
the program. H.R. 2072, the Medicare Early Access bill, introduced by
Representative Pete Stark with 103 co-sponsors, would allow individuals aged
between 55 and 65 this option, and would help them pay for the cost with a tax
credit. A further idea that has been proposed is some form of government insurance
for very high health care costs. This issue has not taken the form of a specific
legislative proposal. An editorial in the industry weekly Automotive News asserted,
“Because of the health care cost trauma in Detroit, a catastrophic-claims pool
underwritten by the government might be a good first step.”57
Legacy Costs and the Issue of Moral Hazard
Overlaying these considerations regarding defined benefit legacy costs, as
presented in a lengthy analysis in the New York Times, is the question of “moral
hazard,” which means that insurance against loss encourages more risk-taking than
would otherwise occur. The term became familiar during the 1980s, in financial
crises such as foreign government debt problems, and, as the author of the Times
article writes, “foolish risks taken by S&L’s of that era in part because their deposits
were insured.” He continued:
Given that pension promises do not come due for years, it is hardly surprising
that corporate executives and state legislators have found it easier to pay off
unions with benefits tomorrow rather than with wages today. Since the benefits
were insured [in the case of pensions], union leaders did not much care if the
obligations proved excessive. During the previous decade especially, when it
seemed that every pension promise could be fulfilled by a rising stock market,
employers either recklessly overpromised or recklessly underprovided — or both58
— for the commitments they made.
On the other hand, such a view may seem unduly harsh, in that workers often
accepted the security of defined benefit promises (pensions and lifetime health care),
as part of a deal involving voluntary early retirement, layoffs and downsizing in
industries and companies that needed fewer and fewer workers per unit of output or
faced increased competitive pressures. As in steel, so now in motor vehicles,
Congress may reconsider the public sector role in determining whether the promises
made as part of these legacy costs are kept.

57 Automotive News, “Washington Must Help the Industry with Health Care” (Oct. 31,

2005), p. 12.

58 Roger Lowenstein, “The End of Pensions,” New York Times Magazine (Oct. 30, 2005).