Ron Gettelfinger's Flawed Logic On Pensions

Friday's Wall Street Journal contained an editorial by Ron Gettelfinger, current president of the UAW.

Gettelfinger's topic is, of course, the funding of labor union worker pensions in the modern world. He begins by describing the 1950 negotiations between GM and the UAW. In Gettelfinger's world, there are only two possible positions- those of GM's Charles Wilson and the UAW's Walter Reuther. The former wanted company-based benefits, while the latter, not surprisingly, favored "universal" benefits for all workers, meaning, one supposes, a sort of societally- or governmentally-funded approach.

Actually, it turns out that both were probably wrong.

However, back to Gettelfinger. He draws exclusively on one Malcolm Gladwell, a writer who authored a piece entitled "The Risk Pool," in the August 28th issue of the New Yorker. According to Gladwell, European social policy, in which there is universal, state-run pension management and liability, is preferred to the US private system. He further alleges that "....individual companies (are) responsible for the care of their retirees. It is this fact, as much as any other, that explains the current crisis."

Near the end of the article, Gettelfinger argues, based upon Gladwell and his sources, that US companies carry a 15% cost disadvantage because of the lack of a universal pension system. Then, in his logical climax, he opines that the only way American pensions can ever be "safe" is to have a publicly-funded universal program.

The trouble with Gettelfinger's position begins at the very beginning. He puts up private pension schemes as the only straw man alternative to a public pension system.

In one of my first posts on this blog, here, written on September 15, 2005, I argued that the real problem is that anyone ever took anyone else's IOUs, instead of cash on the barrel head in the then-present day.

Simply put, anytime any worker accepts promises of future contributions, in lieu of cash, whether accruing in a personal account or general fund, that worker is assuming counterparty funding risks that no banker would ever take for free. Or on anything like the totally unsecured terms involved in an employment agreement.

Gettelfinger is wrong. The best alternative for any worker is for him, or his union, to demand cash payments, whether as current compensation or contribution to his retirement account, from the funding entity. That way, the funder has to solvently provide the payment, and cannot promise future contributions or payments which it may never actually possess.

Both universal and private pension schemes suffer from the human tendency to promise more than one may be able to certainly deliver. And, in the case of pensions, there is no realistic alternative remedy for the funding entity's breach of contract.

No worker should have to bear the risk of funding promised retirement compensation. He might risk the investment performance of those funds, but that is not the liability of the funding organization. If employers, or the government, had to pay cash, rather than than promises, into retirement accounts, then the "risk pool" concept would evaporate.

Problem solved. Without complete universal, publicly-provided pensions.