Comparing Automotive and Steel Industry Legacy Cost Issues

Publication Date: November 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Manufacturing and industry

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Abstract:

The October 2005 bankruptcy filing by Delphi Corporation is reportedly the largest ever in manufacturing and, as Delphi is the largest U.S. automotive parts supplier, it has been a jolt to the whole industry. Concern is also growing over the increasing costs and competitive impact of pension and health care benefits paid by the U.S.-origin manufacturers of motor vehicles, the "Big Three" of General Motors (GM), Ford, and the Chrysler Group of DaimlerChrysler. The recent experience of the steel industry with respect to pension and health care legacy costs may influence the ongoing developments in the automotive sector.

Consolidation of the American steel industry occurred during and after the period of presidentially determined safeguard relief from import competition, in 2002-03. It involved the shedding of pension and health care liabilities, particularly on the integrated side of the industry. But while the domestic steel industry, including the integrated steel mills, the United Steelworkers union (USWA), and the largely non-union steel minimills, all supported trade relief, they were divided among themselves on legacy cost issues. These divisions within the industry prevented it from developing an agreed position on legacy cost legislation. Consequently, when many steel mills went bankrupt, pensioners and workers lost company-paid health care and pension benefits, except to the degree that the latter were covered by the Pension Benefit Guaranty Corporation (PBGC). The health care premiums of some retirees have also been partly paid through a provision of the Trade Act of 2002 (P.L. 107-210).

The Big Three do not face as high a ratio of retirees to active workers as the steel industry, but they find themselves supporting a large number of retirees and health care beneficiaries, because of benefits established and enhanced through several decades of collective bargaining. Unlike the steel industry, total automotive manufacturing employment in the United States today is about the same as in 1990, not in steady decline. However, much of the gain in employment has been at internationally owned assembly plants and their suppliers, generally non-union, and frequently outside the Midwest "auto belt," while the Big Three have downsized employment by 600,000 jobs in North America since the early 1980s. Unless all sides of the industry, including the Big Three, the international competitors, and the industry's unions, can agree on a plan to deal with legacy costs, the impact of industry changes for retirees and health care beneficiaries could be determined once again in the bankruptcy courts.

Thus, legacy costs are again a major issue faced by Congress. Legislation in the 109th Congress includes bills to reform PBGC, particularly H.R. 2830 and S. 1783; to seek reduced costs through use of information technology (as in S. 1418); and, to allow persons not eligible for Medicare to "buy in" to the program (as proposed in H.R. 2072). S. 2045, introduced on November 17, 2005, proposes federal payment of 10% of a domestic automotive manufacturer's retiree health care costs, in exchange for increased investment in producing fuel-efficient vehicles. This report will not be updated.