President &
CEO, Lance
Wallach
Our other Veba
web sites:
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FinanceExperts.org
CEO, Lance
Wallach
- Member of the
AICPA faculty of
teaching
professionals. - AICPA author,
instructor &
national speaker. - National Society of
Accountants
Speaker of the
Year. - Writes financial
articles for over 50
national
publications.
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web sites:
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FinanceExperts.org
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Veba Health Care .com
A Veba Plan LLC site
A Veba Plan LLC site
Veba Health Care.com
68 Keswick Lane
Plainview, NY 11803
ph: 516-938-5007
fax: 516-938-6330
Email:
LaWallach@aol.com
68 Keswick Lane
Plainview, NY 11803
ph: 516-938-5007
fax: 516-938-6330
Email:
LaWallach@aol.com
| Copyright (C) 2008 Veba Plan LLC All rights reserved. |
October 26, 2007
UAW/GM Deal Based On Unrealistic Cost
Forecasts
The recently ratified contract between General Motors
and the United Auto Workers, details of which were
disclosed to the Securities and Exchange Commission,
underscores the precariousness of future retiree health
care benefits.
On one hand, analysts say, the deal to transfer $35
billion to an independent trust to manage retiree health
care is the best deal the union could have made given
the dire financial straits of General Motors. The union will
receive 70 cents for every dollar owed to it-allowing GM
to offload about $47 billion in liabilities.
At the same time, the deal is based on assumptions that
greatly underestimate the cost of health care.
The contract, which remains subject to court and
regulatory approval, is based on the assumption that
health care costs will grow 5 percent annually-a growth
rate significantly slower than in the past 25 years.
From 1970 to 2004, Medicare costs increased an
average of 9.1 percent annually. For private sector
payers, health care costs increased an average 10.1
percent annually. Gerard Anderson, director of the
Center for Hospital Finance and Management at the
Johns Hopkins Bloomberg School of Public Health, says
such an assumption leaves in doubt the UAW's ability to
pay for retiree health care for the next 80 years, as union
leaders have promised.
"The economic trends would suggest it's not viable in the
long run," Anderson says of the union's health care trust,
known as a voluntary employees beneficiary association.
To make the fund financially sustainable, the union must
put its faith in the financial markets, where it will look for
returns on par with some of the best-performing
institutional investors.
According to GM's filings, the current health trust is
funded based on an expected 9 percent return on
investment of the funds assets. That rate of return
equals the 10-year return of 9.1 percent for CalPERS,
the California state employee pension fund.
Another variable complicating the union's funding of
future retiree health care benefits is that 75 percent of
GM's 74,500 union workers could retire by the end of the
four-year contract, significantly adding to the rolls of
health care beneficiaries, which today total more than
500,000 people.
The 5 percent estimate is a common accounting
technique used by many employers to calculate future
health care costs, a GM spokeswoman says, since
actual long-term projections yield numbers that are
unsustainable for the economy.
In 2005, health care costs totaled 15 percent of the U.S.
gross domestic product. That number is expected to
grow to 20 percent of GDP by 2015.
But VEBA consultant, Lance Wallach, says the 5
percent increase in health care costs is deceptive, even
if it is a necessary target. For most people, especially
blue-collar retirees, health care cost increases are
significantly higher.
"That's not even ridiculous, it's preposterous," he says of
the 5 percent projection. "I'm not just talking for these
people, but for anybody."
UAW/GM Deal Based On Unrealistic Cost
Forecasts
The recently ratified contract between General Motors
and the United Auto Workers, details of which were
disclosed to the Securities and Exchange Commission,
underscores the precariousness of future retiree health
care benefits.
On one hand, analysts say, the deal to transfer $35
billion to an independent trust to manage retiree health
care is the best deal the union could have made given
the dire financial straits of General Motors. The union will
receive 70 cents for every dollar owed to it-allowing GM
to offload about $47 billion in liabilities.
At the same time, the deal is based on assumptions that
greatly underestimate the cost of health care.
The contract, which remains subject to court and
regulatory approval, is based on the assumption that
health care costs will grow 5 percent annually-a growth
rate significantly slower than in the past 25 years.
From 1970 to 2004, Medicare costs increased an
average of 9.1 percent annually. For private sector
payers, health care costs increased an average 10.1
percent annually. Gerard Anderson, director of the
Center for Hospital Finance and Management at the
Johns Hopkins Bloomberg School of Public Health, says
such an assumption leaves in doubt the UAW's ability to
pay for retiree health care for the next 80 years, as union
leaders have promised.
"The economic trends would suggest it's not viable in the
long run," Anderson says of the union's health care trust,
known as a voluntary employees beneficiary association.
To make the fund financially sustainable, the union must
put its faith in the financial markets, where it will look for
returns on par with some of the best-performing
institutional investors.
According to GM's filings, the current health trust is
funded based on an expected 9 percent return on
investment of the funds assets. That rate of return
equals the 10-year return of 9.1 percent for CalPERS,
the California state employee pension fund.
Another variable complicating the union's funding of
future retiree health care benefits is that 75 percent of
GM's 74,500 union workers could retire by the end of the
four-year contract, significantly adding to the rolls of
health care beneficiaries, which today total more than
500,000 people.
The 5 percent estimate is a common accounting
technique used by many employers to calculate future
health care costs, a GM spokeswoman says, since
actual long-term projections yield numbers that are
unsustainable for the economy.
In 2005, health care costs totaled 15 percent of the U.S.
gross domestic product. That number is expected to
grow to 20 percent of GDP by 2015.
But VEBA consultant, Lance Wallach, says the 5
percent increase in health care costs is deceptive, even
if it is a necessary target. For most people, especially
blue-collar retirees, health care cost increases are
significantly higher.
"That's not even ridiculous, it's preposterous," he says of
the 5 percent projection. "I'm not just talking for these
people, but for anybody."