The big money in the Chrysler deal is in health care

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Here’s an interesting number, from the footnotes to Daimler Chrysler’s annual report for 2006: $18.5 billion. It’s the estimated current value of health-care benefits that Chrysler has promised its many retirees, minus the money Chrysler has set aside to pay for them.

Contrast that with what private equity firm Cerberus is ponying up to take Chrysler off Daimler’s hands: $7.4 billion.

The retiree health-care obligation is simply the biggest variable in determining Chrysler’s financial future. If Cerberus can cut it substantially, Chrysler will turn out to be a bargain. If it can’t, there’ll be trouble. Nothing else matters nearly as much.

When Toyota’s sales passed GM’s last month, I made the point that health care and pension obligations saddled U.S.-based automakers with “a huge drain on financial resources and managerial attention that their competitors don’t have.” A couple of commenters called this a “red herring,” with one pointing out that Toyota offered pretty great benefits to its U.S. factory workers, with no apparent competitive disadvantage.

But the problem isn’t so much what it costs to employ current U.S. autoworkers, whose pay and benefits are now in the same general realm as that of their counterparts in Japan and Western Europe. It’s that the “Detroit Three” now have far more retirees than employees–in part because they’ve had to shrink in the face of foreign competition, in part because people live so danged long nowadays. At Chrysler it’s something like 80,000 UAW-member retirees and 50,000 UAW-member workers.

The pensions for those retirees are, according to current accounting standards, more than fully funded. Their future health care benefits are barely funded at all. In 2006 Chrysler paid out about a billion dollars for retiree health care. That’s about half what it spent on R&D–and health care costs have been rising faster than R&D spending. This summer, the UAW will negotiate new contracts with Chrysler, GM, and Ford. Retiree health care is going to be a huge part of this.

Everybody involved with the Chrysler transaction was pretty cagey about this today. The UAW’s Ron Gettelfinger made a big deal in a radio interview this morning about Cerberus committing to pour more money into Chrysler’s pension fund. But he was mum about retiree health care. That silence can’t last long.

There’s something pretty disturbing, of course, about the fact that the continued survival of an iconic American corporation depends on how much success its new owners have in forcing old people to give up health care benefits. My take is that putting health insurance almost entirely in the hands of employers was one of the biggest public policy mistakes of the postwar era in the U.S. So maybe, while the Detroit Three and the UAW negotiate, the rest of us ought to be working on figuring out a new health care regime.