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Has Gm Overextended Its Pension Fund?

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General Motors is using its huge pension fund in a way it never intended.

It had planned — and put money aside — for a steady march of retirees over time. But instead, tens of thousands of blue-collar workers, most in their 40s and 50s, are all becoming eligible for retirement benefits now, as the company rapidly downsizes.

And even as its pension fund faces this giant bulge in payouts, G.M. is not putting any new money in — the company is not required to make any contributions to the fund until 2013.

The longer this goes on, the weaker the fund will be and the more uncertain its long-term viability.

For now, the pension payments to its younger “retirees,†part of a deal G.M. negotiated with the United Automobile Workers union in 2007, allow the company to drastically shrink its work force without having to come up with the cash to pay severance. The payments also relieve some of the burden on social service programs in the countless factory towns and counties around the country with large numbers of G.M.’s newly jobless.

“G.M. basically raided the pension plan, by having a lot of these severance benefits paid through it,†said Douglas J. Elliott, a fellow with the Brookings Institution who specializes in financial institutions and policy.

What G.M. has done is perfectly legal. Nor is this the first time an employer has used a pension fund to pay for pruning its ranks. Well-subsidized early retirements are a time-honored practice in the public sector, where teachers often retire after 30 years and police officers can sometimes claim rich pensions after working as few as 20 years. Many corporations once offered sweetened pensions to people in their 50s and early 60s as well, but they have generally stopped the practice because it locked them into making payments indefinitely.

G.M. never stopped. To the contrary. The question now is whether the plan will run short of money and what effect that might have on the company, its workers and retirees, and the federal government, which insures pensions and is now G.M.’s majority owner.

In the short term, G.M.’s newly minted retirees, those in their 40s and 50s, have the most to lose if the plan is rapidly depleted and fails. But over time, the risk will shift to the government and the dwindling number of active U.A.W. workers still building cars at G.M. For those workers, a secure pension is already becoming an increasingly distant dream.

“They could find that they don’t get their full pensions when they retire, because the plan has had to be terminated because of the payments to current retirees,†Mr. Elliott said. “There are definitely these intergenerational transfer issues with underfunded pensions.â€

G.M. declined to discuss the situation, although it has said it intends to keep the plan going when it emerges from bankruptcy.

For decades, G.M.’s blue-collar workers have earned pensions with two components. The first is the “basic benefit,†currently about $1,590 a month, or $19,000 a year, for an auto worker with 30 years’ service. The U.A.W. won this “30-and-out pension†after a strike at G.M. in 1970, and still considers it something close to an inalienable right. In a 30-and-out plan, someone can go to work at 18, work nonstop for 30 years and retire at 48.

Looks like the pension fund is going to implode just like the company.

What a well run company GM was.

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Looks like the pension fund is going to implode just like the company.

What a well run company GM was.

This story has one major GLARING error.

The US government does NOT backstop pensions.

There is a federally run pension scheme that pension from bankrupt firms go into, but it is NOT federally funded, it is funded purely by the money left in the pension funds transfered into it.

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