Relieving Legacy Health Care Costs & Reinvesting in Innovation

Joint Study by the Breakthrough Institute, the Center for American Progress, and the National Resources Defense Council

Recent months have brought news of a growing crisis among U.S. automakers. Faced with surging gasoline prices, aging industrial plants and workers, crushing legacy health and pension costs, and a product line lacking in diversity, U.S. automakers are losing money and market share. The response from industry has been to lay off workers, scale back investment, and offer steep discounts that drive up sales but threaten profitability further.

The story is not a new one. Despite periods of profitability and growth, U.S. automakers have lost large swaths of the global and domestic markets to foreign competitors over the last thirty years. Yet the economic importance of the auto industry is undeniable; roughly one in five jobs in the industrial Midwest is dependent upon General Motors alone.

If the industry’s financial crises deepen in part because of legacy health care costs, the demand for public intervention to ensure the survival of this important sector of the economy will grow. And, given the strategic, historical, and cultural importance of the U.S. auto industry, the political leadership of both parties is unlikely to stand by much longer. Any emergency relief in the form of public investment to revive the U.S. auto industry, however, should guarantee an equally significant public benefit. An initiative to relieve automakers of retiree health care costs could easily be designed not only to address the immediate crisis in health care financing, but also to ensure accountability and progress on broader public goals, by creating strong incentives for investing in modernization, creating and retaining domestic jobs, and reducing U.S. dependence on oil.

The question for policy makers, elected officials, and taxpayers is what form should such action take and what guarantees and accountability should taxpayers demand, in order to ensure such an investment generates quantifiable public benefits.

The American auto industry faces three significant challenges that are closely related though not often considered together in public debates. Because of the way that health care is financed in this country, U.S. automakers bear a staggering financial burden not shared by competitors, covering legacy and catastrophic health care costs. At the same time, domestic manufacturers continue to lose jobs and market share especially in leading edge advanced technology and energy efficient vehicles. These trends are made more ominous as oil prices skyrocket, turmoil in the Middle East persists, and the threat of global warming looms, creating pressure on the nation to reduce dependence on oil, and on firms to change strategy and diversify their fleets.

This white paper is intended as a thought piece, outlining a new strategy to strengthen incentives for the auto industry to invest in good manufacturing jobs in energy saving technology, by offering legacy health care cost relief. We calculate that by investing in assistance for catastrophic retiree health care costs, it would be possible to save over a million barrels of oil a day, while improving the competitiveness of US business and the retirement security of American workers.

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Bracken Hendricks

Senior Fellow

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