Current Events Economics - General

GM-UAW deal

An explanation for the recent General Motors-United Auto Workers deal is pretty simple: it is a transfer of risk.  GM will set up a Voluntary Employee Beneficiary Association (VEBA) which will be controlled by the union.  According to the Detroit Free Press (” UAW ratifies”) GM will place about $30 billion dollars in the account which will pay for the health care benefits of GM retirees.  The benefit to GM is that it can now focus on cutting costs and improving quality in car production, rather than worrying about the risk of increasing health care premiums.  The health care inflation risk is now being transfered to GM retiree beneficiaries.  If health care costs in the future exceed the $30 billion in the VEBA, then GM retirees will have to pay for these costs out of their own pocket.

Why wold the UAW accept this agreement?  Although the UAW accepted increasing risk due to inflationary medical costs, it eliminated another type of risk: bankruptcy risk.  Because the VEBA is controlled by the UAW, GM retirees will still have funded health care even if GM goes bankrupt.  Thus, UAW retirees have eliminated the catastrophic risk (GM bankruptcy) in exchange for accepting increased risk of increasing health care costs.

I believe the VEBA will work out well for both sides.  The deal also may be the death knell for defined benefit programs.