Japanese Cars, American Retirees
By EDUARDO PORTER
The New York Times
nytimes.com
GEORGETOWN, Ky. — For the last quarter-century, Toyota, Honda and Nissan have strived to appear to American consumers like homegrown companies.
They built a string of manufacturing plants in the South, employing tens of thousands of local workers. They hired American designers. They spent millions on ads to trumpet their growing roots in communities across the country.
"Being a good corporate citizen starts with hiring lots of good citizens," one Toyota ad says.
Yet as they built up their operations, the Japanese "transplants" have worked hard not to resemble an American car company in one vital respect: how they treat their retirees.
"We want to avoid commitments when we have no control over their costs," said Pete Gritton, the head of human resources for Toyota's United States manufacturing operations. "We can't build in things in such a way that we won't be able to keep our commitments later."
Until recently, the issue has mostly been academic for the Japanese car companies. Most of the American factory workers they started hiring in the mid-1980's are still working.
But age is creeping up on them. All three Japanese companies are anticipating that the ranks of retirees will swell over the next several years. Toyota's American arm, for example, has just 258 retired production workers (G.M., by contrast, has more than 400,000 retirees).
But things will change over the next five years. In 2011 and 2012, a combined 1,700 workers will be eligible for retirement at Toyota — about 6 percent of its current labor force.
Their retirement will contrast in a crucial way with their counterparts who have retired from the Big Three auto companies in that they will bear much more of the costs and the risks of retirement on their own.
This difference adds up to an important cost disadvantage for the Big Three as they fight to regain market share.
The benefit packages offered by Detroit's three carmakers to its blue-collar workers, negotiated over time with the United Automobile Workers union, pretty much fit a standard model. Retirees receive a pension check every month, which varies with the number of years served.
An average worker who reaches retirement age at G.M. will get a monthly pension check worth about $50 for every year of service, up to a maximum of about $1,500 a month, which accrues after 30 years of service, according to a G.M. spokesman, Jerry Dubrowski. Retirees with 30 years of service get a supplement that brings their monthly check up to about $3,000 until they reach 62.
Moreover, until last year, when General Motors and the union cut a deal for retirees to cover co-pays and deductibles, G.M. covered retirees' health care expenses.
With benefits like these, it's no wonder that G.M. was once known as "Generous Motors."
But these days, health care costs are causing enormous financial headaches for the Big Three. G.M. has an unfunded liability of $85 billion in today's money to cover future health care costs for workers and retirees. That is seven to eight times the market value of the whole company.
General Motors estimates that health care costs add about $1,500 to the cost of each vehicle it makes in the United States. Chrysler claims a health care cost of $1,400 per vehicle. Ford says its burden is $1,100.
G.M.'s pension plan has also been a drain. Since 1992, G.M. has plowed $56 billion in stock and cash into it. It is hoping to reduce its burden by offering all of its 105,000 U.A.W. workers buyout packages worth up to $140,000. It is still unclear how many plan to accept the offer.
"The higher legacy costs are reflected in a less modern product," said George E. Hoffer, a professor of economics at Virginia Commonwealth University who has studied the auto industry. "They had to cut costs somewhere else and they cut costs in retooling."
Japanese companies face little of this burden in Japan, where the government covers retirees' health care and pays a bigger share of workers' pensions.
Toyota expected to pay out about $700 million in pension benefits in fiscal year 2006, which ended in March. That's less than a tenth of what G.M. expects to pay on its pensions this year.
In the United States, retirees of the Japanese companies pay part of their health care costs. And the Japanese companies' pension obligations are a fraction of that of the American carmakers.
While G.M. paid $5.4 billion last year for the health care of its 141,000 workers, 449,000 retirees and their dependents, Toyota said in its 2005 annual report that its obligations to cover the health care expenses for its retirees "are not material."
At Honda, a 60-year-old retiree with 10 years of service would typically pay $345 a month for health care; a 62-year-old retiree with 25 years at the company would pay $70. Toyota also requires retirees to pay part of their premiums, based on years of service.
In general, these retirees are cut off from the company health plan when they turn 65, and receive instead a lump sum with which they can buy supplementary insurance to Medicare. Honda is alone among the big three Japanese carmakers to still offer a defined-benefit pension guaranteeing a monthly check to newly retired workers in the United States.
At Toyota, a worker's pension consists of an investment account in which the company deposits the equivalent of 5 percent of a worker's earnings each year, typically around $3,000 to $3,500. An employee can supplement that with a 401(k) plan, and the company matches contributions up to a maximum of 4 percent of the worker's income.
For the company, these retirement packages carry no uncertainty. But they do for workers, whose nest eggs depend on their contributions and the financial markets.
Consider Richard Baugh. The 61-year-old worker, who applies sealant on Camrys, Solaras and Avalons in the paint room, is planning to retire next January after 17 years at Toyota's factory here, to tend his horses and teach at his local church in nearby Cynthiana.
His wife, Ruth, 58, will also retire after 14 years at the plant. With total savings of some $700,000, the Baughs feel ready for retirement. They were thrifty, plowing at least 12 percent of their wages into their 401(k)'s.
"After the stock market crash we stayed invested and kept buying, and our 401(k) roared back," Mr. Baugh said.
With less than 25 years at the company, they will have to pay a portion of their health insurance premium, which Mr. Baugh said would amount to some $300 a month.
Tim Garrett, vice president of administration at Honda Manufacturing of America, says talk of the Big Three's "legacy" problem is overblown. Had they set enough money aside when the workers were active, their retirement would not be costing them anything today. "Depending on your decisions you will have legacy costs or you will not have legacy costs," Mr. Garrett said. "We have no legacy costs."
To be fair, Detroit's car companies were no more shortsighted than many companies in other industries. From steelmakers to telephone companies, free health and defined pension checks were a staple of the retirement packages negotiated between America's industrial titans and their unions half a century ago.
When these companies were growing quickly, providing generous retirement benefits seemed cheaper than offering better pay, a future cost that often did not even have to be accounted for on the financial books.
From 1990 to 2005, G.M.'s payroll shrank by two-thirds, and its current work force is now just one-third the number of its retirees and their dependents.
Today, defined-benefit pensions are dwindling across industries, as companies force retirees and active workers to pick up part of their health costs. According to a survey by the Kaiser Family Foundation, only one out of three big companies now provide health care coverage for their retirees, down from two-thirds in 1988.
In 2003, 22 million workers were covered by some sort of defined-benefit pension, 8 million fewer than in 1980, according to the Center for Retirement Research at Boston College. And the number of workers in defined-contribution plans jumped to 52 million, from 14.5 million, over the same period.
Union contracts have limited what Detroit's car companies can do with their blue-collar workers, but they are paring back where they can.
G.M. eliminated health care coverage for its salaried, nonunion retirees hired after 1993. This year, it froze the salaried workers' defined-contribution pension plan. Chrysler made its salaried workers pay more for their health care starting this year.
Under an agreement last year with the autoworkers' union, retirees at G.M. and Ford will start paying part of their health care costs, up to $370 a year for an individual and $752 for a retiree's family.
With Detroit sagging under the burden of these "legacy" costs, it is unsurprising — even to executives at the Big Three — that the Japanese companies arriving in America chose to do things differently.
"These are well-managed companies," said Frederick A. Henderson, G.M.'s chief financial officer. "It is natural that they would look at our experience and say 'I don't want to do that.' "
Copyright 2006 The New York Times Company |
