GM’s struggle on health care costs is a preview for the rest of us

It’s notable that the central issue in GM’s current battle with the United Auto Workers is about health benefits. (See UAW is Facing Biggest Battle in Two Decades in today’s Wall Street Journal.) GM has a high ratio of retirees to current workers, generous health benefits, and the beneficiaries have no real incentive to save costs. Health care costs are part of what’s dragging GM down –it’s an expensive factor of production not faced by overseas competitors. GM can dump some of the problem on the government, especially as the Medicare drug benefit kicks in. The UAW is likely to agree to lower benefits for future workers to preserve the higher benefits for its existing active and retired membership.

The GM situation is a microcosm of what the US as a whole faces. The population is aging, the ratio of retired to working citizens is rising, and little is being done to restrain costs. It is already impacting national competitiveness in a negative way.

Like GM, the US government would like to offload the problem onto others. In the short/medium term it’s being done by running budget deficits financed from abroad. But that can’t last forever. To avoid lower benefits for younger people, we’ll have to make the system more efficient.

June 10, 2005

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