GM's Collapse Offers A Warning on Retirement Benefits

(MoneyWatch)  The collapse of General Motors and the other automakers offers some hard lessons on retirement security. While the promise of a lifetime pension and retiree medical care sound great, it largely depends on your employer's ability to run a profitable business.

If your employer runs a lousy business, don't be surprised if your retirement benefits go down the tubes along with the company.

Here's how it could play out:

1. You work for a company that promises you a lifetime pension and retiree health care. You rely on those promises and don't accumulate your own financial assets to cover these liabilities.
2. Twenty years goes by and your employer isn't in as good a shape as when they made those promises. They start to play with the numbers and lobby for exemptions to their funding obligations. They argue that they need to put off funding these retiree items so they can dedicate more cash flow to improving the business.
3. Another ten years goes by and guess what, they're in worse shape, and your retiree benefits are at risk. By this time, it's too late for you to accumulate enough assets to offset what you might not get from your employer.
4. Then your pension gets cut because it's underfunded and your retiree medical is slashed because there isn't enough money to pay for the promised care.

Not a good situation.

In my opinion, a better approach is to negotiate for your pension and retiree medical costs as a part of your current pay, and then save the money yourself. That way, you know where it is and how much risk is being taken with it. And your retirement benefits won't be dependent on whether your employer is smart enough to compete in the global economy over the next 30 years.

Yet, employees still push for more employer supported benefits. They think if they offload the funding and investment risks on the employer, their worries are over. As you can see with GM, that isn't necessarily the case. The risks are there and if the company can't handle them, you may get the short end of the stick (steel, airline and other workers have suffered similar fates).

Bottom line: Treat your job like a business. Make sure you're getting paid enough to save adequately for your retirement and your retiree medical costs. Then oversee the money yourself.

Junk cars photo from Flickr courtesy of The Consumerist, CC 2.0