While America Aged
Summary
Lowenstein examines how American defined-benefit pension promises became unfundable, using three extended cases: General Motors, the New York City subway system and the Transport Workers Union, and the city of San Diego.
The common mechanism is deferred cost. In each case, management faced immediate pressure, usually a strike threat or an election, and settled by promising future benefits rather than present wages. Future benefits cost nothing in the current budget, required no cash outlay, and under the accounting rules of the period did not appear as a liability in any form that constrained the decision. Union leaders accepted them because members valued retirement security and because the leaders would not be in office when the bill arrived. Actuarial assumptions about investment returns, mortality and healthcare cost inflation were set optimistically, which reduced the reported obligation further.
The General Motors case is the most detailed. Lowenstein traces the 1950 agreement that established company-paid pensions and later healthcare, the effect of retiree healthcare costs on vehicle costs, and the way these obligations constrained the company's ability to compete and to invest as its market share fell.
His general argument is that defined-benefit promises made by parties who will not bear the cost are structurally unreliable, and he is sceptical of both management and unions rather than blaming one side.
The book was published in 2008 and its urgency about a coming crisis has been partly overtaken: private-sector defined benefit plans have largely been frozen or terminated, and the problem migrated to state and municipal plans, where it remains. The analysis of accounting and actuarial assumptions is sound but predates the subsequent changes in pension accounting standards.
Key takeaways 7
- Pension and retiree healthcare promises were used to settle labour disputes precisely because they required no current cash.
- Accounting rules of the period allowed employers to make large future promises without recording a corresponding liability.
- Actuarial assumptions about investment returns and healthcare inflation were set to produce acceptable numbers rather than accurate ones.
- Union leaders and managers both had incentives to defer costs beyond their own tenure, so neither side resisted.
- General Motors' retiree healthcare obligations added a significant per-vehicle cost that its competitors did not carry.
- A defined-benefit promise transfers investment and longevity risk to an employer that may not exist when the payments fall due.
- Public-sector plans repeated the private-sector pattern with weaker funding discipline because governments cannot go out of business.
Who should read it
Operators and investors assessing companies or municipalities with legacy benefit obligations, and anyone negotiating deferred compensation.
About Roger Lowenstein
Financial journalist and author; Wall Street Journal reporter for over a decade
Buffett: The Making of an American Capitalist and When Genius Failed are the standard reference accounts of Buffett's rise and of the LTCM collapse.
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