If you've picked up a newspaper recently, you know that General Motors (NYSE:GM) is going through a rough patch. Despite the bad news, company executives insist the auto giant will be able to weather these latest storms. Even if that forecast proves correct, I suspect the company's retirees may not be so lucky.

We're all aware that the approaching wave of baby boomer retirements will squeeze government resources in the years ahead. If the thought of Social Security shortfalls and ballooning Medicare costs scares you, perhaps you should be thankful you don't work for GM. The challenges the company will face in trying to keep its promises to retirees mirror the looming federal budget dilemma. GM employees, particularly younger ones, must confront the frightening possibility that neither their employers nor Uncle Sam will be equipped to meet their income and health-care needs in retirement.

An ailing giant
How did GM get to this point, anyway? For generations, the company flourished like few other companies in American history. GM amassed an impressive record of sales and earnings growth and firmly established itself as one of the "Big Three" players in the auto industry -- with only Ford (NYSE:F) and Chrysler (NYSE:DCX) competing in the same league. This uncrowded field meant that even when GM didn't squash the competition, the industry still generated plenty of demand to line the pockets of all three rivals. The company's strength and profitability elevated it to iconic status as a symbol of American capitalism, as its activities produced strong ripple effects that benefited other areas of the economy, such as materials and manufacturing. But like all streaks of good fortune, the tide had to turn sooner or later.

I'm not saying the company is on death's door just yet. GM is still the world's largest automaker, but cracks are certainly starting to appear in the armor. Assuming the company stays afloat, earnings growth may never again match the robust levels it reached in its glory days. The reasons for the decline probably say as much about the changing landscape of the auto industry as they do about the popularity of GM's cars or the effectiveness of its management. Whereas a small group of domestic automakers dominated the market decades ago, the ensuing years witnessed the emergence of Toyota (NYSE:TM) and other overseas rivals whose products and prices appealed to American consumers. As you'd expect, this encroachment ate into GM's market share: Since the postwar era, the company's share of American auto sales shrank from 50% to around 25%.

No signs of relief anytime soon
More recent developments are also far from encouraging. Sales and earnings have been particularly sluggish of late, and the company recently lowered its earnings outlook for 2005, warning that this year's earnings could be as much as 80% below expectations. Despite the introduction of new models such as the Pontiac G6, Buick LaCrosse, and Chevrolet Cobalt, GM lost $1.1 billion for the first quarter of 2005 and first-quarter sales in the U.S. dropped 5.2% vs. the same period in 2004.

The greatest source of concern right now is the North American market, where high gas prices are partly to blame for the slump. However, similar troubles at Ford, coupled with America's continued strong appetite for cars, suggest that consumers here at home are simply finding better value in the products offered by those overseas competitors. For example, Toyota's U.S. sales for the first quarter of 2005 jumped an eye-popping 10.6% over the same period a year ago.

In response to this litany of distressing signs, the status of GM's bonds was recently downgraded to near "junk" quality. The stock, which hovered near $50 as recently as a year ago, is now languishing in the $30 range.

Mounting obligations weigh heavily
And then, of course, there's the issue of GM's crippling obligations to current and future retirees. As part of its commitment to attract and retain good employees, GM provides outstanding benefits that extend beyond retirement age. Former GM workers receive continued medical coverage from the company along with generous pension benefits, helping to ease the financial strains of retirement. To the company's credit, GM is one of a dwindling number of companies that still offer such benefits in an environment increasingly marked by shifting responsibility for retirement to the worker. But in an ironic twist, GM's admirable generosity could prove to be its own Achilles' heel.

Lavish retirement benefits were an extravagance the company could easily afford when earnings were soaring and competition was less intense, but that's clearly no longer the case as the company struggles to succeed. If GM ultimately buckles, it will be at least partly because of the burdens imposed by its promise to support its retired workers. And while stiffer competition and reduced market share have rendered those burdens that much heavier, that's only part of the story.

The other part lies in evolving demographics, which have heightened the challenge of sustaining retired employees. Medical costs have risen much faster than overall inflation for years now, a situation that is threatening many employers' ability to shoulder their workers' healthcare, let alone that of their retirees. (GM's yearly tab for health care currently stands at a whopping $5.6 billion!) Even more significantly, people live much longer than in previous generations. When GM first rolled out its benefits, the average worker who retired at 65 could expect to live a few more years, which would typically be spent in a sedentary lifestyle. Workers who retire at that age now face the prospect of 20 years or more in retirement, and many will eke out as much travel and other activity from those years as possible.

Not surprisingly, these trends have taken a huge financial toll on employers who send their retirees monthly pension checks and foot most of the bill for their health care. To give you some perspective on the scope of the problem, GM's retired workers now outnumber its active workforce by 2-to-1.

The bottom line: retirees likely to suffer
I noted that you can't help observing the parallel with our government's fiscal woes. But unlike a corporation (even a titan like GM), Uncle Sam has almost bottomless pockets and ample time to grapple with a potential crisis. The more time and money GM spends trying to solve this problem, the more ground (and market share) it may lose to its rivals. I know the company is taking proactive steps to remain profitable and bolster its competitive position, and it may very well survive.

But it seems increasingly likely that the price for GM's survival may be broken-or at least watered-down-promises to retirees.

Fool contributor Robert Allen holds no position in any of the companies mentioned in this article.