Chrysler’s bankruptcy filing has rocked the auto industry—and stoked concerns about the viability of its pension and retiree health care benefits.
Thursday’s filing in New York, the first of its kind since Studebaker’s brush with bankruptcy in the 1930s, allows Chrysler to restructure debt, cancel contracts and close down operations that typically would have continued running.
President Obama, flanked by members of his auto industry task force, said at a news conference he believes Chrysler will emerge stronger from the Chapter 11 filing. Obama also said he expected the entire bankruptcy process to take 30 to 60 days, a much shorter time than is typical, because Chrysler filed under a section of the U.S. bankruptcy code that allows for a company’s assets to be sold quickly.
At the same time that it filed for protection from its creditors, Chrysler announced it was selling a 20 percent stake to Italian automaker Fiat. The pact was made possible by concessions from Chrysler stakeholders, including the United Automobile Workers union, which will own 55 percent of the company—and a controlling stake for the first time—when it emerges from bankruptcy.
A Chrysler spokesman told AARP Bulletin Today that the company’s pension and health care plans would remain intact. About 255,000 workers were in the pension plan as of last November. Of those, 144,000 were retirees receiving payouts.
“Of course people are nervous, but over time we’ll emerge into a vibrant company,” said spokesman Mike Palese. “I still believe there will be better times ahead and that’s what we all work for.”
But a bankruptcy filing brings uncertainty, said Ellen O’Brien, an economist with the AARP Public Policy Institute, and older workers and retirees stand to lose substantially.
“There’s no guarantee that pensions and retiree health coverage will be protected, putting their retirement at risk,” she said. “Even with federal protections, pensions could be considerably reduced.”
A Chapter 11 bankruptcy doesn’t terminate or change the status of a company’s pension plan, said Jeffrey Speicher, a spokesman for the federal Pension Benefit Guaranty Corp., which insures these plans.
However, Chrysler’s pension plan was not fully funded, and as of Nov. 30 there was a $9 billion shortfall, Speicher said. The PBGC would guarantee $2 billion in pension funds, while the remaining $7 billion would represent lost benefits to workers and retirees, he said.
In the event of a plan termination, Speicher said retirees at age 65 could collect the maximum annual benefit of $54,000. But that limit is lower for younger retirees. The maximum benefit for a 50-year-old worker is $18,900.
Chrysler retirees and older workers are also concerned about company-funded health care coverage until they become eligible for Medicare. In a revised contract with Chrysler that was ratified this week, the United Auto Workers union agreed to accept half of the $10 billion that is owed to its retiree health care trust (known as a voluntary employees’ beneficiary association, or VEBA) in Chrysler stock instead of cash. The trust will take over health care coverage for about 125,000 retirees and their dependents beginning next year.
But like Chrysler’s pension plan, the VEBA plan is severely underfunded, raising questions of how long it will last. Lance Wallach, a New York financial expert on VEBA plans, criticized the UAW for accepting the deal and putting retirees’ health care coverage at risk.
“The retirees are going to run out of money for health insurance at some point,” Wallach said. “I’ve been saying this for the last year. The VEBA is grossly underfunded. The workers got cheated.”
Retirees also lost their dental and vision coverage under the revised contract, and copayments for prescription drugs rose from $5 to $20.