GM Retirees Will See Health Benefits Cut

(MoneyWatch)  The deal that General Motors just made with the United Auto Workers will require cuts in the medical benefits of retirees, according to papers submitted to union members. And the impending bankruptcy of the embattled auto giant might push those benefits over the edge in a few years.

According to Reuters, retiree benefits will be reduced immediately at the direction of the U.S. Treasury, which is expected to own 70 percent of GM after it comes out of bankruptcy. The government is demanding this concession because of GM's "difficult financial situation." Benefits could be cut further in 2011 and 2012 if GM's stock price does not recover.

The reason why retiree benefits depend on the share price is that the UAW has agreed to accept half of the $20 billion that GM owes a union-directed health care trust in stock and new debt, rather than cash. The UAW made a similar deal with Chrysler for stock in lieu of cash contributions to the Voluntary Employees Beneficiary Association (VEBA).

The VEBA will receive 17.5 percent of the common stock in the restructured automaker. It will also get $6.5 billion worth of preferred shares that pay a 9 percent dividend, along with a note for $2.5 billion.

Reuters says the UAW plans to pay 2010 and 2011 retiree health benefits in cash, including an anticipated $585 million dividend from preferred stock. The union does not believe it will be able to sell any GM common stock before 2012.

The union's deal with GM suffers from the same weaknesses as the pact it signed with Chrysler when that company filed for bankruptcy. The UAW will have little influence on the future management of GM, and if the company doesn't bounce back, the VEBA for the "Big Three" automakers could well go broke. Even if it doesn't, the union will have it all it can do to hang onto health insurance for its working members, let alone fund retiree benefits. So retirees, like stockholders, may wind up with nothing. And the government is not legally required to make good on GM's promise of retiree health benefits.

The Obama Administration has pledged to invest at least $50 billion in GM after it's restructured. That may help save the company in the long run. But the signs so far are not good for saving the health benefits of GM's 1 million employees, dependents, and retirees. For that, they may have to look to Congress for healthcare reform.