First General Motors – Then Social Security? – While lots of politicians have been seizing microphones to proclaim that GM went under because it failed to make "green cars", the truth lies elsewhere. The financial crisis pushed every automaker to the brink. Toyota sales fell even more than GM's. Car loans were hard to get whether your product was "green" or purple.
GM went under because over the decades it mortgaged away its future. Rather than pay huge hourly wage hikes, management negotiated smaller hikes by trading off for higher pension and health benefits. That would be the problem for the next chairman anyway. So, for decades, they used this process to pass the "hot potato" along. Ultimately, it became an untenable burden and when car lending collapsed, they went over the brink.
Jim Brown of Option Investor put some eye-popping numbers on that story in his Wednesday report. Here's a bit of what he said:
In 1962 GM had 464,000 workers and was paying benefits to 40,000 retired workers. There was one retiree for every 11.6 employees. The average age at death was 67. GM currently has 62,000 hourly workers and 29,000 salaried workers in the USA. Today GM also has 493,000 retired workers drawing benefits and the average age at death is 77. That is 5.4 retirees for every single active GM worker. Over 75% of the retirees were hourly workers. The average retiree receives $37,800 in payments annually plus medical benefits.
There is no possible way that a single employee can support 5.4 retirees in the manner they have become accustomed. This is why the UAW has already begun cutting benefits to current retirees as a result of the bailout deal. GM has transferred its liabilities to a trust and as part of the bailout the UAW gets a 17.5% ownership position in GM plus some other payments. When GM comes out of the bankruptcy they will no longer have this monster cash drain. Unfortunately retirees will be forced to live on drastically reduced income levels.
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