Cadillac Pensions

What the UAW didn't win.

The following was written by Mary Williams Walsh, a New York Times escapee and the managing editor of News Items. The subject is the resolution of the autoworkers strike. The mainstream press called it a “big win” for the labor movement. UAW president Shawn Fain said it was “a record contract” and urged his members to approve it. The “Big Three” automakers didn’t say much. They didn’t come away empty-handed.

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Workplace by workplace, the United Auto Workers are voting on their new contract this month. So far, the Ayes have it, though it’s not unanimous. 

“We won things no one thought possible,” UAW president Shawn Fain told the members. “We not only won a record contract, but we have begun to turn the tide on the war on the American working class.”

But there’s one notable thing the union didn’t win: The reinstatement of the pension plans at the Big Three. The plans were closed to new hires in 2007, in a desperate bid to cut labor costs. A two-tiered compensation system was then established: Anybody hired before 2007 went into Tier 1, where they could keep on building up their defined-benefit pensions and have a retiree health plan waiting when they retired. Anyone hired after 2007 went into Tier 2 and got a 401(k) plan and no retiree health care.

There were other differences between the tiers, but being split into pension haves and have-nots was a watershed event for the UAW. It’s jarring to see that now, 16 years later, the rank and file seem content to keep things this way. 

For decades, it’s been an article of faith in the labor movement and much of the public sector that defined-benefit pensions are hands-down superior to 401(k) accounts. When the 401(k) plan was introduced, in 1978, it wasn’t meant to be a primary retirement tool, but that’s what it’s turning out to be, at least in the private sector. The UAW’s new contract underscores the change.

It was the UAW, more than any other union, that made traditional, defined-benefit pensions the good deal they’ve been for decades, for millions of Americans, union or not. It was the UAW that pushed to have pensions protected by federal law after Studebaker went bankrupt in 1963, leaving some retirees penniless. The resulting Employee Retirement Income Security Act of 1974 requires companies to properly fund their workers’ pensions, to meet fiduciary standards, and to insure their pension plans through the Pension Benefit Guaranty Corp. 

None of that existed before the UAW made pensions an issue. The law the union championed, known as ERISA, still protects millions of people.

A defined-benefit pension, by the way, is the type where each retiree gets a stream of monthly payments, from retirement to grave. There’s much to be said for it. People with pensions don’t have to worry about outliving their assets, because the money is pooled. They don’t have to worry about making investment decisions either. Even if a company goes bankrupt and its pension plan fails, the PBGC will step in and keep making the payments.

I wondered what made the Tier 2 generation give up all that in favor of a 401(k) plan. So I took a look at the UAW pensions–the actual amounts that Tier 1 retirees are getting every month. (Each Big Three automaker has its own pension plan for UAW workers, so I looked at GM’s plan, which is by far the biggest and the easiest to find records for. I assume the plans at Ford and Stellantis are similar because of “pattern bargaining.”) 

And I was surprised. I’ve always heard rude cracks about “Cadillac pensions” in the legacy auto industry, and indeed, the aggregate pension numbers do seem huge. As of September 2022, GM had UAW pension obligations of nearly $40 billion. It pays out about $4 billion per year. Those must be some pensions!

But they’re not. The most recent headcount for GM was 226,414 retirees. A simple average suggests they’re getting about $17,700 apiece. Averages can be deceiving, so I also looked at a handbook explaining the benefit design. (The handbook was four years old, but there’s no reason to think there’s been a radical increase.) It showed that a UAW member who retired in 2007 after 30 years at GM would get a base benefit of $19,314 in his first year of retirement. The pension would then increase slightly every year, so that by 2010 it would be up to $19,548. 

That’s really quite modest, especially when you compare it to the pensions offered by America’s states and cities (which are not bound by ERISA). I looked at police pensions in Chicago. The records don’t go back to 2007, but they do show that in 2010, an officer with 30 years of service got a pension of $83,772 in his first year of retirement—more than four times the deal at GM. 

The UAW has a “flat dollar” pension plan, which makes it impossible to “spike” a pension by working insane amounts of overtime just before retirement. Spiking is common in governmental pension plans. 

The UAW plan also has what’s known as a “Social Security bridge benefit,” which adds to its total cost. It means a worker who retires before reaching his normal Social Security retirement date gets his base pension plus a “temporary benefit” for a few years. 

Example: Charlie retired in 2007, at age 62, after working at GM for 30 years. His normal Social Security retirement age was 65. His base benefit in Year One was $19,314 per year. He also got a “bridge benefit” of $18,288 per year.

His base plus his bridge gave him a total retirement income of $37,602 at age 62. The base benefit increased a little bit every year after that. And then, when he turned 65, GM stopped paying his bridge benefit. Charlie still got total retirement income of $37,836 in 2010, but the GM pension fund paid only $19,548 of it. Social Security paid the rest. 

I really don’t think $19,548 is a “Cadillac pension.” Sure, defined-benefit pensions have advantages, but what if, in the end, they’re too small to live on? 

True, Charlie’s pension has grown since then, but only a little. A UAW pension increases every year by a small amount, set in collective bargaining. It took four years for Charlie’s base benefit just to grow from $19,314 to $19,548. 

The Chicago police pension not only started out more than four times as big, but every year after that, it compounded by 3 percent. That’s the pension law for cities in Illinois. The officer who retired in 2010 on a pension of $83,772 would get $94,439 four years later, and keep getting 3 percent more every year for the rest of his life. Now we’re talking Cadillac! 

And yet: What good is a Cadillac pension if it’s only 23 percent funded? That’s where the Chicago police plan now stands. The city can’t afford to keep its promises, and yet it has to keep them. It’s a terrible problem.

It’s easy to offer outsized pensions if you don’t have to fund them. Companies can’t get away with that any more, what with the demands of ERISA. And it’s gotten progressively harder since the law was enacted in 1974. The plans have matured since then, lots of people have retired, and accounting changes have brought the true cost of pensions into focus. (States and cities aren’t bound by ERISA, and they have different accounting standards. More on that in the near future.)

It turns out to cost a lot more than you might think to pay $20,000-a-year pensions. Twenty years ago, GM had some $70 billion in its UAW pension fund, but it wasn’t enough. So in 2003, GM issued an unheard-of $19 billion bond to top up its pension fund. And it still fell short.

How far short? The accounting rules for companies allowed a lot of haze back then. They permitted the commonplace actuarial practice of spreading gains and losses over many years. But in 2006 an updated accounting standard required companies to bring their pension numbers up to date immediately. When GM complied, its balance sheet stopped balancing. Its pension fund was so big that its shortfall gave the whole company a negative net worth. You just couldn’t see it until the accounting rules were sharpened.

The following year, GM closed the pension plan. There were still hundreds of thousands of retirees, and tens of thousands of active workers, all of whose pensions GM would still have to fund and pay for decades. 

With so many retirees, GM had to do things differently. The plan would need a lot of cash to pay everybody’s benefits every month. Its timeline shortened. If it got caught in a down market, it wouldn’t have time to earn the losses back. GM stopped investing in illiquid assets. It greatly reduced its investments in stocks. 

Today 66 percent of the pension fund is in conservative bonds. Bonds can lose value too, of course, but GM chose bonds that it could hold to maturity, with principal and interest payments timed to coincide with the payments due to retirees. Market ups and downs don’t really matter with a strategy like that. The plan’s in good shape now, although it must have been expensive to buy all those Investment-grade bonds in the years after the financial crisis. 

But that’s what GM did, and I think GM’s low-risk approach helps explain why running a mature defined-benefit pension plan is expensive, even when the benefits are modest. Funding pensions this rigorously costs money.   

So far, it seems to be working. Remember how the Chicago police pension fund had just 23 cents for every dollar of pensions it owes? GM’s pension fund has $1.30. 

I can imagine GM’s horror in September when the UAW proposed adding tens of thousands of new people to this plan, so carefully calibrated to pay all Tier 1 benefits, come what may, until the last retiree dies, decades from now. No way!

But I can also imagine the Tier 2 workers’ reaction when they learned that their coworkers’ hallowed defined-benefit pension plan, so steeped in labor history, pays about $20,000 a year after 30 years of work. That’s not what comes to mind when you think about winning “the war on the American working class,” as Shawn Fain put it. A 401(k) plan, now with a 9.5 percent company contribution, up from 6.4 percent under the last contract, must have seemed the better bet.