When Americans heard news of Social Security funds running dry, they panicked. Unfortunately, Social Security was not the only retirement fund pulling up short.
A VEBA or voluntary employee beneficiary association is a form of trust fund in the U.S. and covers medical costs for 820,000 unionized workers and their families. With rising medical costs and poor investments, the trust fund is underfunded by almost $20 billion and is now forced to cut benefits and ask for more cash from retirees and companies. The lack of funding is largely caused by the dependence of VEBAs on company stock, which causes the trust firm to be extremely vulnerable to market volatility.
In reaction to the potential shortfall of VEBA, the United Auto Workers (UAW) union has negotiated with GM and Chrysler to divert 10 percent of workers’ checks into the VEBA funds. If the plan fails to clear and investment returns do not improve, benefits will be cut from the retirees.
The current situation of VEBAs not only affects UAW, but also the United Steel Workers union, which is struggling to provide healthcare benefits for its tens of thousands of employees through VEBA. Tom Conway, vice president of USW, elaborated to The Wall Street Journal on the retirement fund’s inability to support itself through investments alone. “No matter how good your investment performance is, you are not going to be able to keep up with health-care inflation.” He suggests that the trustees to “take a serious look at increasing premiums” and “the retiree contribution.” Although VEBA is planning on increasing out-of-pocket payments by participants next year, VEBA is still considered to have generous benefits especially since only 26 percent of large U.S. companies provide health care benefits to retirees, compared to 37 percent a decade ago.
The UAW first signed the agreement with VEBA in 2007 under which the Detroit Three auto makers committed $54 billion to the trust. Today, the trust has become one of the largest private health-care providers, but companies have had second thoughts about the funds as the rising health-care costs has made the companies more uncompetitive than their non-unionized counterparts.
Nevertheless, the three auto-maker companies have contributed to VEBA recent loss in funds. When GM and Chrysler declared bankruptcy in 2009, VEBA accepted more company stock in place of cash, but since last year, GM shares have dropped an additional 28 percent, thus further worsening VEBA situation. The funds have averaged a 9.7 percent rate of return in 2010, but VEBA trust officials are now forecasting a mere 7 percent in the upcoming years.
With the rising cost of medical treatments and an uncooperative market, America’s retirement funds have continuously experienced structural problems in recent years. The strategies that have seem to be working for the past few decades come up short as the market is flooded with economic downturns and increasing prices. The future is not looking pretty, but as negotiations continue to occur between unions, companies and the government, there is hope that retirement can once again be something to look forward to, not dread.