Friday, April 15, 2005

A couple of years ago, Paul Krugman wrote a column about the dangers to our economy of many corporations underfunding their pension plans. The warning fell into a black hole. I heard no more about it--until I saw the cover article of the April Harper's magazine: "The $4.7 Trillion Pyramid--Why Social Security Won't Be Enough to Save Wall Street." It turns out that rescuing underfunded pensions may be the lurking motivation in the rush to privatize Social Security. Let me explain.
Until the fifties, few average Americans had money in stocks. IRAs and 401(k)s didn't exist yet. Then in 1950 General Motors set up employee pensions by deducting a percentage from each paycheck and adding a percentage of corporate money. Other businesses followed suit and soon everybody was doing it. The influx of cash contributed to the fifties bull market. From the beginning, though, corporations tended to fudge on their responsibilities by investing the money only in their own stock, thus driving the price up and giving them enough cash to buy out other companies. The problem was that if a company went bankrupt, the pensions disappeared as well. In the seventies, the government required corporations to diversify their pension investments and mandated that all such pension funds had to buy insurance from the Pension Benefit Guarantee Corporation (PBGC). Well and good, but as the decades rolled on, more and more corporations began underfunding their pension plans. They justified shortchanging pensions by making wildly optimistic predictions about the rate of return they expected from the market, in essence saying, "This is all we need to invest for our pensions because we expect fantastic returns."
The faster companies projected their funds to grow, the less they had to set aside to pay their retirees. The lower set-asides in turn allowed them to report higher earnings, thereby driving up the price of the company's own stock to "create shareholder value." Faced with a choice between living up to their pension promises or reporting higher net earnings, companies simply decided not to live up to their employee agreements.

Companies could squeak by with that kind of thinking during the nineties, but once the high tech stock bubble burst, corporations began facing consequences. Pension plans for the airline and steel industries, in particular, are in trouble, and the auto industry looks shaky as well. Of course, there is insurance for such problems, but a series of bankruptcies last year pushed the PBGC $23 billion into the red, so if the PBGC had to bail out all the underfunded pensions at once, it would go bankrupt itself.
What these businesses need is a large enough influx of cash into the market to give them great returns on their investments. Enter privatized Social Security accounts. They would keep the Ponzi scheme afloat for a few years more. Eventually, of course, it would collapse, though.
It's not the first time a government has scammed investors. In the early seventeen hundreds, both Britain and France, desperate to pay off public debt, persuaded citizens to invest in stock bubbles that burst and the investors paid dearly. One way or another, the public bids fair to pay for this pension fiasco. Perhaps the G.O.P. take on it is that it's better to put off the day of reckoning. But I think we'd be better off swallowing the bitter pill when pensions go bust and knowing the truth about who was at fault. Keeping the Ponzi scheme going by privatizing Social Security will only create larger disasters in the end.
After the market crash of 1929, F.D.R. put Jack Kennedy's father, Joe, in charge of the SEC and ordered him to craft a series of market reforms. Joe Kennedy had made a fortune in the market in the twenties and more money even as the crash was going on. F.D.R. took a lot of heat for the appointment, but his theory was that it takes a thief to catch a thief, or at least that a thief might know how to prevent future robberies. Considering the never-ending craftiness of corporations, we need a new Kennedy/Roosevelt duo in power in every generation. Without someone to rein them in, corporations, shortsighted in their greed, will always find a way to shoot the whole country in the foot.


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