Future Perfect

A.D. Freudenheim, The Editor

Over Thanksgiving weekend, my parents started chatting about the choices they now have to make under President Bush’s brilliant new Medicare scheme: what supplementary insurance plan to buy, what benefits they will and won’t have, what kind of paperwork will need to be completed. Fortunately, this was a conversation with someone with great knowledge of the subject – and not with me. I tuned it out. Completely.

It is not as though the changes to prescription and other health benefits for retirees are irrelevant; that’s not at all true. The details are highly relevant, to the poor (figuratively and literally) people who need to sift through the complexities of the system to survive, as well as those of us who are young(er) and employed – we the people who are paying into and, ultimately, now paying for the system, so that we can bankrupt ourselves and our own future. Well, that may not be the purpose, but it is certainly likely to be the effect.

And that is precisely why I tuned out: the details of how the plan works now will be entirely different by the time I am ready to retire or when I am in a position to need the support of Medicare or Social Security. If the plans even exist at that point, which they likely will not. Either way, they are unsustainable in their present form, as the demographics of our nation skew increasingly towards the elderly, as more money is drawn out of the system than can ever reasonably be put in, and as consecutive legions of incorruptibly corrupt Senators, Representatives, and Presidents pander for elderly votes now rather than a more youthful, future prosperity.

Now go one step beyond government entitlement programs to look at personal retirement savings, in whatever form – cash, IRAs, 401(k) plans, and general investments. Hopefully, everyone has some savings of some kind, and makes an effort to build it over the course of their working lifetime. Not that it necessarily matters. The interconnectedness of our financial and entitlement systems simultaneously force us to take advantage of the connections, even as it also endangers us.

The benefits of all these connections are obvious: we save, we invest, we plan, because it is good for us in the long run, and because our tax system (mildly) incentivizes the process. We save because we are told that Social Security may help us, but that our own savings and other supplements to the system will guarantee us more comfort and more economic and social freedom. Our savings are placed in extended growth structures, hopefully to earn more money in the long run than they might, conservatively, in the near term. We buy our homes both because it seems like a good long-term investment, and because our tax system encourages us to do so, if we can. All of this may seem like an issue predominantly left to or discussed among the more educated and high-earning parts of our society, but that is not accurate; union members and others working in different parts of the American industrial and service sectors may receive retirement planning benefits and are encouraged to use them. Even corporations like WalMart are reconsidering the types of benefits they offer to their most entry-level employees (though many employees likely will remain financially unable to take advantage of those benefits; they need to cash just to live).

The dangers to this are equally obvious, though we prefer not to think about them: it could all be worthless. Whatever I imagine I will be able to save for my retirement, no matter how much professional help I receive to encourage me to save, to determine the amounts to be saved, and to guide those investments and manage those funds, a crash of some kind is possible. The need to support an insupportable Social Security, Medicare, or some other hard-to-control element of our economy could force changes that would affect more than those receiving the benefits of those programs – including corporations in which we have investments, and upon whose success we depend financially. Higher taxes or inflation could eat away at our retirement funds or their spending value. Banks could fail, yet insured deposits are only covered to $100,000 – a ludicrously small sum when contemplating twenty or more years of retirement. No portfolio diversification could possibly account for or accommodate all of these theoretical disasters.

***

A ready-made example exists in the macrocosm of General Motors, a disaster that has been waiting to happen for decades. GM recently announced that it plans to lay off as many as 30,000 employees, and cut a variety of costs, to achieve more than $15 billion in overall savings. As GM’s chairman and CEO, Rick Wagoner recently noted in the The Wall Street Journal, talking about the firm’s high health care expenditures for present and past employees, “American auto makers and other traditional manufacturing companies created a social contract with government and labor that raised America's standard of living and provided much of the economic growth of the 20th century. American manufacturers were once held up as good corporate citizens for providing these benefits. Today, we are maligned for our poor judgment in ‘giving away’ such benefits 40 years ago.”¹

Well, not quite; GM was forced for create this “social contract” by a powerful labor union and a government that for much of the 20^th century supported the union’s activities implicitly. More to the point here is the impact of that “social contract” beyond the world of GM’s own employees – a problem that may well affect our collective future. When GM lays off employees, those employees suffer, and so do the smaller businesses and economies that depended on those GM employees to spend their money in local stores and restaurants. When GM renegotiates pension benefits, retirees suffer (and so do the micro-economies they feed), and so do current employees, who either make greater sacrifices for their own long-term benefit ... or do not. Neither is an ideal situation. When GM’s stock goes up, as a result of the layoffs, a different set of people benefit, even as others suffer.

Little discussion seems to take place about the relative merits of corporate health in one direction or the other, until disaster is imminent: not among the unions, which greedily assume that more benefits for their workers is, by default, better for everyone; and not among the bankers and investors who push GM to take what are presumably called “long-term” steps that may have short- and long-term consequences beyond what they can imagine. In other words, GM's fortunes affect can affect the entire marketplace into which it is tied: employees, dealers, repairmen, parts suppliers, consumers, and of course, investors. Those investors may also be retirees, with no association with or connection to GM except as shareholders; and their long-term financial health may be at odds with the needs of those present or past workers whose jobs, salaries or benefits GM may soon cut.

***

GM’s Wagoner wrote that “we at GM do not want a [government] bailout” – nor should they receive one. In the harshest possible sense, employees, unions, and investors have all conspired to create the present disaster by choosing, for many years, to ignore the obvious implications of their respective actions, and by pushing for short-term gains without evaluating the real, substantive, long-term impact. Could there possibly be a GM investor who thinks (or, indeed, has thought for years now), in the face of all evidence to the contrary, that bigger, less-well-made, less-fuel-efficient cars and trucks actually had much of a future? How does any investor – never mind a manager or employee or union official – ignore the rise of Toyota and the implications of its success for GM’s many weaknesses?

The fallibility with which GM’s managers, unionized employees, and investors made their respective decisions only proves the equal fallibility of the rest of us, too. We save for our futures because we must, because to do otherwise would be pure folly, and because we hope that our economy and its various elements will all hold together long enough to take us through our own lifetime. Knowing all the variables, recognizing our fallibility, should make us more politically active, more insistent that the problems we can see on the horizon – the problem of Social Security, Medicare, Medicaid, and beyond; problems that bear such a striking resemblance to GM’s current woes – must be addressed. Instead, it seems to make us more complacent, or resigned. Maybe instead of “Future Perfect,” this essay should have been called “Things Fall Apart.”

1“A Portrait of My Industry,” by Rick Wagoner, The Wall Street Journal, 6 December 2005