The problem with the American auto industry and other sectors that have collapsed is that their unions negotiated benefits the companies eventually couldn’t pay. They were bargained for when the companies were making lots of money and the workers rightfully demanded their share. Unfortunately, instead of paying all of it out in salary, unions and managements agreed to create pension plans that deferred much of the compensation until later. That’s why GM can’t compete with Toyota and meanwhile Delphi is bankrupt.

It’s easy to agree to create pension plans when nobody is retired. In 1966, managers and union heads didn’t have any reason or responsibility to worry about what would happen in 2006. Likewise, current management and union leaders can’t do anything to fix it. The only answer is bankruptcy. This allows companies to abandon their pension obligations but also costs shareholders virtually their entire investment.

The problem is the pensions. GM has a shocking five times as many pension-receiving retirees as it does current employees. A much more reasonable form of compensation is creation of 401K programs that reward employees to save (by giving them tax breaks) and are matched by employers not with future promises but with current cash. The plans are held not by the company but by banks or mutual funds. This is what almost all non-union private employers do. It’s what GM’s managers of today wish had been done in 1966. It’s what Toyota, Honda and all the other competitors of GM are doing. It’s why Honda and Toyota are thriving while GM is going broke and Delphi is firing its workers.

But what’s happening in the auto industry ought to be raising red flags about our own country. The only employees with more lavish pension plans - private sector union members - are those who work for government. Cities, counties, states and school districts all have enormous pension plans. Most allow workers to start drawing benefits while still in their 50s. The debacle in Milwaukee County where employees have retired en masse to tap into enormous pensions is the future of the rest of the state. Thousands of baby boomers will be drawing pensions that will have to be paid out of future benefits.

But unlike GM and Delphi, government employers won’t be put out of business by competitors. It will have to pay out these enormous obligations with budget cuts or tax increases. (It’s not hard to guess which option they’ll choose). This will drive property taxes so high in high-pension states like Wisconsin that more and more residents will relocate to low-pension states like Arizona and Florida. This will shrink the tax base, with a sickening snowball effect that sees taxes go even higher as the declining remaining population has to pay the full freight.

But there’s an even bigger problem. Social Security and Medicare are set up the same way. Tens of millions of baby boomers are going on the dole. They’ll live longer than earlier generations. Fewer younger workers will be required to support more retirees. President Bush tried to address this mess in 2005 and got nowhere. Those who refuse to address this looming crisis are the equivalent of the GM managers and union bosses who 30 years ago set in motion the eventual destruction of their company.

***

Saving Social Security and Medicare will get harder every year. Costs will keep going up and the number of retirees will keep increasing. The more retirees there are, the harder it will be politically to enact changes. State and local government, however, do have a solution.

If Wisconsin and other states pass firm limits on annual spending increases, it will require them to hold the line on spending to compensate for the annual increases in their pension costs. The proposed Taxpayer Protection Amendment will do that. Opponents are yelping that controls on spending will force draconian cuts in services. But those cuts will be far more severe if they aren’t made until after the retirement costs go through the roof. The mayors, school board members and teachers union leeches who oppose TPA are doing the same thing the GM bosses and union did in the 1960s and the same thing opponents of Bush’s Social Security reforms did last year.

If these steps aren’t taken now, the federal government won’t pull a Delphi and file Chapter 11. States, cities and schools won’t simply wither away like GM. Instead, their only means of being able to pay in the future the enormous obligations that are being created today is to enact enormous tax increases and benefit reductions that will have terrible ramifications. Which route will they take? Biting the bullet now? Passing the buck to the future? The experience of GM, Delphi, Tower Automotive, Pabst and other companies crushed by union benefits doesn’t lead one to an optimistic conclusion.