Chrysler Bankruptcy Threatens Retiree Health Benefits

Chrysler’s Chapter 11 bankruptcy has dealt another body blow to the tottering system of employer-based insurance. The United Auto Workers’ health trust, which the Big Three automakers set up in 2007 to meet their retiree healthcare obligations, now has a 55 percent stake in the new company that will own most of Chrysler’s assets. The quid pro quo is that the health trust (known technically as a Voluntary Employee Benefit Association, or VEBA) will accept this equity in lieu of $5 billion in cash, or about half the amount that Chrysler promised to invest in the VEBA. If the ailing automaker gets dismembered in bankruptcy proceedings, or fails to recover in coming years, its retirees could lose all or part of their healthcare benefits.

What’s more, the VEBA and the union that stands behind it will have only one director on the nine-member board that will run the Chrysler successor firm. The U.S. Treasury, which will administer the VEBA share of Chrysler, will name four directors. The Canadian government and Fiat, which is taking a 20 percent share in the company, will appoint the rest.

Ford and GM also owe large sums to the UAW’s VEBA, which was promised a total of nearly $60 billion to cover retiree health benefits. If one of the automakers goes down for good—and remember, GM is also on the ropes—the VEBA might be unable to fulfill its obligations to retirees. While the government could step in to help, it is not legally required to do so. The Pension Benefit Guaranty Corp. takes over pension plans of bankrupt companies, but it doesn’t have to do the same for retiree health plans. It has been speculated that this is one reason why the UAW agreed to take equity in Chrysler in lieu of cash payments to the VEBA.

Ironically, the VEBA was established to improve the balance sheets of the already ailing carmakers by capping the amount they’d owe retirees under union contracts. At the time, it seemed like a rotten bargain for the union, which would have to make enough from investments to close the gap between the companies’ contributions and future health costs. But now it looks like a sweet deal by comparison.

In a worst-case scenario, most of Chrysler’s retirees will be able to fall back on Medicare—although that will still leave a big hole for them to fill in out-of-pocket health costs. Most immediately affected will be the workers who will lose their jobs, along with their health insurance.

What all of this underlines, yet again, is the unsustainability of a health care system that depends largely on employers to provide health coverage. Congressional healthcare reformers need to find a way to put us on a road that leads toward individual ownership of insurance. Employers must pay their fair share, along with consumers and the government. But many companies will be unable to meet their obligation unless we change how health care is financed, and soon.