AFSCME 3357-HOF'S BLOG

It's the Dependency Ratio, Stupid

Robert Farago has a very good article at thetruthaboutcars today titled GM: Kicking the Habit. It's about dependency ratios. In 2005, General Motors had 143,000 employees to take care of 453,000 retirees, a ration of 3.2/1. Actually, when you look at total dependents, it's worse than that. The active workers usually have spouses and kids. The retirees generally have at least a spouse. Moreover, the ratio probably was made half-again as large due to the employee buyouts this year. The buyouts created more retirees and fewer active workers. At some point, you just can't be productive enough to take care of the burden. Farago makes an excellent illustration:


Economists use dependency ratios as an analytical tool to examine national economies. ItÂ?s a pretty simple concept. Imagine a single man bringing down $100k a year. Mr. ManÂ?s got sufficient liquidity to buy a brand new Corvette. Now imagine the same guy making the same money married with 2.3 kids. He can only read about the joys of Corvette ownership (probably here, for free).

The single guy's supporting one person with one income, creating a one-to-one dependency ratio. Assuming his wife doesn't work, the married manÂ?s living not-so-large at three-point-three-to-one. The more dependents a productive worker/economy must support, the less profitable and thus, financial viable, he/it is.

If this suggests to you that there is an inherent limit in the doctrine of "shrink to survive", that's the whole point. The only way to improve the dependency ratio is to survive until retirees die off (Since some of these retirees are only 50 years old, it'll be awhile), or shed the pensions through Chapter 11 bankruptcy.