GM’s Troubles May Usher in New Era of Benefits Cuts

General Motors Corp.’s announcement that it will end medical benefits for retirees 65 and over effective January 1, 2009, marks a milestone in the ongoing trend to slash retiree health coverage. For more than a decade, companies that offer retiree health coverage (generally Fortune 100 firms) have been gradually whittling away at these benefits through methods including increasing the premiums retirees must pay, increasing deductibles, and excluding new and younger employees from future retiree benefits.

While GM is not the first to eliminate these benefits (Ford Motor Co. led the way last year), GM’s move packs a particularly big punch because of the sheer numbers involved -- more than 97,000 salaried retirees, their spouses, and dependents, according to The Detroit Free Press. (Unionized retirees aren’t affected by the decision). The high-profile move may cause more companies to follow GM’s lead.

To soften the blow, the company will increase monthly pensions by $300, which most retirees will use to purchase Medicare coverage. However, Medicare is less generous than most private sector plans, and someone in poor health may be facing significantly higher health coverage costs as a result of the switch.

The cuts are part of a broader belt tightening for GM, whose stock had fallen to depths not seen since the 1950s; its market value has fallen to $5.57 billion, about 20 percent of where it was about eight years ago, according to The Wall Street Journal. The company also announced cost-cutting plans in addition to reducing retiree healthcare costs including suspending its quarterly dividend, cutting North American salaried expenses by 20 percent, lowering capital spending by $1.5 billion and selling between $4 billion and $7 billion in assets.

But as GM outlined the plan for digging itself out of the current abyss, foreign car manufacturers are expanding on U.S. shores in an effort to take advantage of the weak dollar. Volkswagen AG announced it will build a new plant in Chattanooga, Tenn. with a capacity to produce 150,000 vehicles. VW sales in the United States for the first half of this year were up modestly from last year as Americans abandon their SUVs and pick-up trucks for smaller, more fuel efficient cars.

If they had the chance, some Hummer drivers might opt for the electric car that GM abandoned in the 1990s. They’ll just have to wait until 2010 when GM will try again.