Tuesday, June 5, 2012

History of and Update on Caterpillar and Ilinois Schools ... Grandma Bertha and Mom


I grew up in a small town in central Illinois in the 1940s and 50s before heading off in 1961 for college and beyond.

My Grandma Bertha performed vital shift work as an hourly employee at Caterpillar during and after World War II, and until her retirement in the late 1950s.

She was a really hard working and very nice lady. The "Rosie the Riveter" World War II lyrics were meant for people like her:

"All the day long,
Whether rain or shine
She's part of the assembly line.
She's making history
Working for victory
Rosie the Riveter."

My Mom began work as an hourly employee in the grade school cafeteria in the early 1950s. She continued to work there to help put my brother and me through college in the 50s and 60s.

And last but not least, Dad worked at the Hiram Walker distillery in Peoria as an hourly employee until his retirement in the late 1960s. He would remark from time to time that Caterpillar had better fringe benefits than Hiram Walker did. I neither knew nor asked why.

So I have both some considerable personal history with Caterpillar, public schools, unions and even how the present state of employee benefit plans developed over the years.

Let's take a brief trip down memory lane to see how we all got from there to here.

As part of the war effort, companies were encouraged during World War II to grant generous  health care benefits to employees in a national attempt to hold down wage increases. A government provided tax incentive meant that the benefit would not be taxable to the employee. Thus, companies paid for health care for employees but employees realized no taxable income for the benefit. That helped grow health care benefits for employees of large companies such as Caterpillar. It cost Cat nothing extra and was just like wages, but it was beneficial to the employee, being non-taxable income.

About that time pension plans were becoming popular employee benefits as well. The Social Security system had started in the 1930s and pension plans later became part of the fringe benefit package available to employees of big companies such as Cat. Money contributed by companies to fund pension benefits was deductible from taxable income for the companies, again just like wages, and was used to fund pension benefits for the company's employees.

The UAW represented hourly employees in the Detroit based auto industry and was a very powerful union indeed. It also represented hourly employees at Caterpillar's Peoria operation. That UAW connection probably explains why my Dad's distillery didn't have as generous benefits as did Caterpillar workers.

When Mom began working in the grade school cafeteria. there were no unions representing teachers, cafeteria workers or other public school employees in Illinois. That all came later.

Post World War II

We won World War II, of course, and the world is now a much better place for our having done so.

Grandma and the rest of the "Rosie the Riveters" did a great job during the war years, as did those Americans belonging to my Mom and Dad's generation. And they did all this great work on the heels of the Great Depression of the 1930s.

After the war ended, the U.S. was pretty much the only economy on its feet. We then proceeded to help others, including Europe and Japan, get back on their feet. Although I didn't fully realize it at the time, it was indeed a special time for America, Americans and the free world.

Unions in both the Private and Public Sectors

Our U.S. economy was the envy of the world, and American workers began to receive very substantial pay and benefits. In the 1960s, the public employees began to join public sector unions.

At some point, the Detroit based "Big 3" auto workers adopted the "30 and out" provision as part of its pension package. That simply meant that after 30 years of work, an employee could retire with a full pension for the rest of his life.

So in addition to generous health care plans, rich pension plans were soon adopted by companies, too.

As a result, newly formed public sector unions negotiated similar packages for public employees.

All was well for some time, at least until global competition picked up and our widespread  entitlement programs became too expensive. We no longer ruled the industrial world completely.

Accordingly, things started to go awry economically as global competition increased, OPEC came into being and oil prices skyrocketed, and countries like Japan and China joined the market place competitive race for market share.

Of course, no such competition came to the monopolistic public sector in America.

The Simple Economics of How We Got Here with Health Care and Pensions

Assume that person A is self employed, person B (B for Bertha) works for Caterpillar and person M (M for Mom) is an hourly paid school employee.

They each earn and are paid $100 for their work. A is self employed so he can divide the $100 between pay, health care and retirement pay in any way he chooses. He's on his own and free to choose as he elects

We'll assume A allocates $70 for spending, $15 for health care and $15 for retirement needs.

Person B, our Cat employee, will pick a higher amount for health care, since she doesn't want to have to pay taxes on income earned which later will be needed to pay health benefits. That will make Cat's benefits look very attractive to others, as was the case with Dad.

B will also want a nice pension benefit and will welcome the fact that Cat is responsible for providing that retirement benefit, no matter whether the money is available to do so or not. A will perhaps be a little envious of B's guaranteed pension.

Person M is a late entry to the collective bargaining table, but she sees what B already has and wants that, too. So she negotiates as much health care benefits as possible and a nice pension plan benefit as well.

Even though perhaps unknown to M, she now has a big advantage over both A and B. Unlike A and B, the taxpayer has her back. Even better perhaps, the government negotiators don't properly consider long term costs when granting pay and benefits. And the union negotiators representing M are pros. It's like taking candy from a baby when they sit across the bargaining table from their amateur government counterparts.

What Public Sector Professional Union Negotiators Know

Here's what the union negotiators know. It's as simple as 1-2-3-4.

(1) For one thing, government uses the pay-go cash system of accounting. (2) For another, it doesn't have to make a profit to stay in business. It's a monopoly. (3) And for a third thing, the government negotiators probably won't be around when the inevitable shortfall appears revealing a lack of funds to pay the promised benefits. (4) Why do the government negotiators want to fight about this stuff, in other words?

Now let's assume that we represent the school employees during labor negotiations. We want all the pay increases we can get for our members and are not concerned about whether there will be enough money set aside to pay for M's pension. That's the taxpayers' responsibility, regardless of whether there's enough money set aside or not.

And that's why we don't want to even consider a risk based 401(k) plan either. We know the taxpayer is on the hook and will have to make good on M's retirement claim.

And if we can get something close to what Cat employees get with health care benefits, that's even better, even though they have negotiated for that outsized health care benefit because of government tax rules originating in World War II. In any event, they got them, so that's what we want for the school employees, too.

In simple terms, public sector negotiators will want to put the entire $100 in wages and let the taxpayers worry about the rest of it. And that's how public sector pay got to be higher than comparable private sector pay. And benefits, too.

FDR's "Wisdom" and Role

When Social Security was passed in the 1930s, it was called insurance. In fact, nothing about Social Security other than what it's called is insurance.

It's an intergenerational pay-go system which depends on current workers to pay for the retirement benefits of retired employees. In the beginning essentially no money was set aside to fund the program or its benefits.

And here's the "wisdom" part of the story. FDR believed that future generations would not pull the plug on such a popular "insurance" program, even if it encountered serious financial obstacles, which it has. It would be too popular of a benefit to be withdrawn from We the People. Future politicians wouldn't dare. He was right about that.

Pension Update

Pensions are fast becoming a thing of the past in the private sector. They are being replaced by 401(k) plans. The risk and reward of providing retirement income is being placed on employees. Thus, how much is contributed on B's behalf by companies, including Caterpillar, will be important to B going forward. M as well.

Health Care

Health care costs are so expensive today that a great national debate is raging, including the constitutionality and costs of the  newly enacted ObamaCare legislation. Constitutional or not, our health care costs are unsustainable and something will have to be done about them sometime soon. That will matter to A, B and M as well.


We're much older than we were when Grandma Bertha retired. Accordingly, the "30 and out" formula is no longer sustainable, whether for private sector employees or public sector teachers and others. If we retire at 50 instead of 70, that's 20 extra years of pay for non-work. And that will be expensive.

Summing Up

We'll try to bring greater clarity to all these areas of discussion in future writings, but the enumerated problems are real and definitely need to be addressed and solved by We the People as a whole.

We won World War II together, and we'll learn how to live within our means together, too. And better compete for business globally as well.

Grandma Bertha, Mom and Dad knew how to do those things, and we must prove that we know how to do so as well. Together.

Grandma Bertha, Mom and Dad were great people, and so are the employees of Cat and our schools today.

We just have to be willing to face facts, talk openly, make decisions and then move forward----together as We the People.

If they overcame Hitler, Pearl Harbor and the Great Depression, this Pogo dilemma we've created for ourselves is an abolute no-brainer to solve.

That's my take

Thanks. Bob.

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