And that, of course, is precisely what they did not do. Instead, the overseers at GM tiptoed through a kind of bookkeeping loophole. “Retiree benefits were a future cost,” Lowenstein writes. “Forced to choose, executives inevitably found more slack in future budgets (if they bothered to calculate them at all) than in present ones. Thus they repeatedly offered richer pensions later in exchange for modest increases in wages now.” San Diego officials engaged in a similar shell game. Their desire not to raise taxes made the city council look at pensions as an ideal vehicle for funneling money to city workers without actually having to pay for it.
Since these decisions amounted to mortgaging the future to keep peace in present, they seem obviously wrong in retrospect. But the truth is that they were obviously wrong at the time they were made, which is what makes Lowenstein’s story so infuriating. It’s not that offering pensions was a mistake. But offering—and continually expanding—pension commitments without preparing to meet them was impossible to defend.
What makes the behavior of these institutions so mysterious is that aging is not exactly a new process. This is the nice thing about looking at an actuarial table: it makes it very clear what you can expect. (The rapid inflation in healthcare costs made forecasting the future value of health-care benefits more difficult, but Lowenstein shows that as far back as the 1960s, auto executives were aware that health-care inflation was a serious problem.) Yet whenever actuarial reality told them something inconvenient, Lowenstein’s protagonists chose to ignore it. When their pension funds had a good year in the stock market, they often spent the proceeds instead of saving them as a bulwark against the bad years. When they needed to make their pension obligations look smaller, they boosted the expected return on their investments, creating the illusion that the fund was in better shape than it actually was.
The glaring question is why. As Lowenstein sees it, the people making the decisions were too insulated from the consequences of those decisions. And again, they had incentives to take care of things in the present while letting the future go to hell. After all, the nature of retirement benefits is that by the time the bill comes due, the people who negotiated the deals are usually long since gone. Someone else can pay the costs down the road.
In that sense, While America Aged is about more than just pensions. It’s really an excellent case study of a bigger and more general problem in the modern economy, namely the principal-agent problem. Today, we (the principals) have to put more and more responsibility for our lives in the hands of others (the agents), whom we pay to represent us. (Shareholders are the principals, CEOs the agents; voters are the principals, elected representatives the agents.) And sometimes this works great. But what’s become increasingly clear is that unless the incentives in a principal-agent relationship are carefully designed, agents are often going to look out for their own interests first.
The recent boom in reckless behavior by people working for mortgage brokers and investment banks—behavior that in some cases wrecked entire companies— can be explained in large part by the fact that the people who made the bad decisions had a short-term interest in doing so. And pensions, of course, exacerbate the principal-agent conflict, because of the factor of time. In the short run, taking a tougher line on pensions means that executives need to pay higher wages, raise taxes (or cut profits, if they’re running a company), or risk a strike. None of those options are especially attractive. By contrast, if they’re generous with pensions, they get to keep the peace and not give up very much in the present. Everyone wins—except the future citizens or shareholders, now saddled with hundreds of millions or even billions of dollars of debt. As Lowenstein suggests, this was a recipe for disaster: “Retirement schemes necessarily involve a treaty between today and tomorrow, and on a mass scale. It is no surprise that so many have run aground, or that when they do, financial upheaval is the result.”