Monday, September 19, 2005

Dare We Dream?

Thanks to Mark Hyman for offering one of the most cogent arguments for not turning Social Security over to privateers.

In his
most recent commentary, Hyman gnashes his pearly whites about the possible shortfall in local and state pensions, particularly in regard to the amount of money he claims U.S. taxpayers will have to pony up to make up these shortfalls. Repeating the lie that Social Security is facing “insolvency,” Hyman tries to scare his audience into believing government-run retirement plans are all rat holes.

But Hyman’s telling less than half the story. An even bigger financial iceberg looms ahead (and which we actually have already begun colliding with): the shortfall in private sector corporate pensions. Not only does the mismanagement and irrational exuberance of corporate pensions bode ill for employees who had put their faith and retirement savings into them, but it also exposes taxpayers to even more risk than all the state and local pension shortfalls combined.

Hyman would love for you to think that only public sector pensions are hurting and might cost you money to bail them out. This is just the latest example of the government/corporate = devil/God analogy that lurks beneath much right wing rhetoric.

But the fact is that taxpayers also bail out private pensions. In 1974, the government created the Pension Benefit Guarantee Corporation (PBGC) to serve as an insurance policy for those employees who might be left in the lurch if the company they worked for went belly up. For years, the PBGC operated just fine, with very little demands on its resources.

In recent years, however, things have changed. The economic explosion of the Clinton era caused corporate pension managers to become overly optimistic about future returns. CFOs wanted to have their cake and eat it too by offering glitzy benefits packages to employees while not actually socking away enough money to guarantee the ability to pay for these packages. When economic malaise set in shortly after the election of George W. Bush, this mismanagement surfaced, and many of the nation’s biggest and oldest corporations faced financial crisis because of unwise (and often unethical) financial decisions and reliance on hypothetical earnings to make their balance sheet arithmetic work out (see: “Enron”).

The result? Corporate pensions face a collective shortfall of around $450 billion, more than $100 billion more than the figure cited by Hyman regarding public pension shortfalls. This kind of debt
threatens to swamp the PBGC (which is already begging Congress for a bail-out). In a situation reminiscent of the Savings & Loan debacle of the 1980s, American taxpayers could very well end up paying for the fiscal mismanagement of these private pensions.

In the case of state and local governments (whose pension funds were weakened primarily by the economic downturn of the last several years), lawmakers and citizens are cooperating to reconfigure retirement funds so that they can remain solvent and pay benefits. Hyman cites Houston’s situation as a nightmare scenario, but the people and city leaders
released themselves from their earlier pension format and are recreating the city’s retirement plan so that it can pay employees what they’re owed without going deeply into the red. It’s less than clear if corporate leaders will take the initiative to rework pension benefits for the good of all employees or if they will continue to drop their debt onto the American people (usually while the executives responsible for the mess retire early with multi-million-dollar portfolios).

What the pension shortfall in both the public and private sector shows is the high level of
risk involved in putting all your retirement eggs into Wall Street’s basket. Even “diversified” portfolios managed relatively conservatively can end up in the red.

If only there was some sort of system in which citizens provided a baseline of financial stability to all retirees, some system that was designed to weather storms of the financial markets by pooling our collective resources and investing them in the future of the nation via government bonds rather than wagering them on profit-driven companies; a plan that would be able to say with confidence that it could pay out benefits at an expected rate for decades to come, and perhaps even indefinitely as long as politicians didn’t pander to their wealthy friends by spending this collective money on tax cuts for only one percent of Americans; a plan that offered all workers, regardless of income, a guaranteed source of retirement resources. . . a sort of social security system.

And that’s The Counterpoint.

PS. I consider the
article by Professor Michael Hudson referenced above to be a must-read piece about not only the pension issue, but Social Security in general. Offering the analysis of an expert with the clarity of an accomplished writer, Hudson’s piece offers a streamlined but comprehensive analysis of much that is wrong with the privateers’ arguments.

Hyman Index: 3.97


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