Thursday, December 08, 2005

Protecting pensions? Not government's responsibility!

(Be sure to check my followup.)

Unless there is fraud or a breach of contract, it is not the responsibility of any government to ensure the solvency of any private pension plan. Clarification: Don Luskin expressed concern about my phrasing, because it implies government should ensure the solvency if a company commits fraud or does not fulfill its contractual obligations. True. What I meant to say was that government should not involve itself with the solvency, except to provide remedies through the courts.

I had meant to address this a couple of nights ago but have been a little busy. However, it gave me time to see that this is a story many people have missed.
Bush Urges Business to Protect Pensions

KERNERSVILLE, N.C. - President Bush called on American businesses on Monday to live up to their pension promises, saying too many companies are not putting away enough money to protect the retirement benefits of their workers.

"My message to corporate America is you need to fulfill your promises," Bush said. "When you say to a worker, 'This is what they're going get when they retire,' you better put enough money in the account to make sure the worker gets that what you said."

In a speech on the economy, the president said federal rules governing pensions are confusing and misleading and allow companies to technically play by the rules without funding the promises they make. In the end, taxpayers wind up footing the bill because of federal pension insurance, he said.

"So Congress needs to straighten up these rules," Bush said. Members of his economic team said pension-reform legislation moving through Congress is not tough enough. "And I'm not going to sign a bill that weakens pension funding for the American workers," Bush said....

Trying to calm Americans' anxieties about the economy, Bush said the economy is growing and added 215,000 jobs in November. He called on Congress to extend tax cuts that are due to expire, and urged passage of long-pending health and energy legislation.

"This economy is strong and the best days are yet to come for the American economy," Bush said.

Bush's approval on handling the economy was at 37 percent in an AP-Ipsos poll in early November, the lowest rating yet on the economy. More recent public polls have shown a solid majority of Americans have a pessimistic view of the health of the economy these days despite signs that it has been gaining strength after blows delivered by the hurricanes this fall and a spike in energy prices....

"It is his runaway budget and trade deficits, billions spent on tax giveaways, backwards-looking energy plan designed by and for special interests, and inaction during this country's health care crisis that have created a myriad of problems for our children's generation," said Sen. Harry Reid, D-Nev., the Senate minority leader.

Former Sen. John Edwards, D-N.C., his party's 2004 vice presidential candidate, said Bush's speech was "nothing more than a politician's attempt to help himself. Instead, he should be helping the American people. The legacy of this president is a mess in Iraq, millions of Americans falling into poverty, millions without health care, and out of control gas prices."
That President Bush said these things is extremely disappointing, but as a matter of pragmatic politics, he had no choice, really. He had to try for political points with the American people by taking a more populist position, rather than the right decision the American people cannot accept. However, let's take some small comfort in the fact that he isn't as economically boneheaded as Harry Reid and John Edwards.

The first thing that both sides do not understand, or perhaps are unwilling to acknowledge, is that the pension plans' insolvency is simply because workers are not saving enough to cover what they will later received. Unlike what the New York Times and others have claimed, it has nothing to do with stock market downturns. Check out the chart of the S&P 500 that Josh Hendrickson posted, and ask yourself what Don Luskin did: as there was no bad stock market in the long term, "Now just how the hell did United manage to lose money here?"

It is a breach of contract when employers fail to deliver promised retirement benefits, but it is irrelevant when the pension plans' woes are purely structural. The workers, so often unionized, expect unrealistic retirement benefits, and worse, they expect government to do something about it. It's much like the pyramid scheme of Social Security: the initial retirees will do very well off an initially fattened pension fund, which will dwindle if future workers continue to contribute at an unsustainably low rate.

I discussed the structural problems more extensively in my entry on the real problem with United's pension fund. For years, certain companies have relied on high profits to cover the structural deficits in their pension plans, but now that United and others are having massive revenue shortfalls (to put it mildly), they can no longer cover the gap between pension contributions and pension payouts. But the unions don't want to pay more into the pension fund. They want the companies to pay with money they don't have, so then it becomes the responsibility of the Pension Benefit Guaranty Corp., which will then have to be bailed out by taxpayers. Few things can so well fulfill what Bastiat said: "The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else."

I briefly returned to the issue of structural problems in my entry on Congress' hypocrisy, after Congress voted to "tighten regulations" on the PBGC but ignores Social Security. The latter is a pension program affecting far more people than the PBGC, but as I said, "it's far easier for Congress to pass legislation telling private companies what to do than pass legislation to fix perhaps the largest Ponzi scheme in history." The same thing is happening today, with Congress looking to impose further regulations on businesses, further burdening them and decreasing their profit margins, and further decreasing their potential for growth. All in the name of protecting workers, which no law has any real power to effect -- unless it's about government bailing out the pension funds.

I have a question for President Bush: where in the Constitution is he, or any other part of the federal government, given authority over companies' pension programs? Or is this just another abuse of the Interstate Commerce clause? I see no Constitutional provision for the federal government to regulate pension programs, and a host of other things (not the least of which are education, a "national energy plan" and virtually all of the transportation bill). Maybe it's in Robert Byrd's revised edition, the one saying it's fine for him to take tax money from other states to build roads and bridges in West Virginia.

Regular readers of my blog know that I search for market solutions in just about everything. Being greatly influenced by Austrian economics, I do not think it is inherently bad when things fail. I do not think it is a bad thing to let structurally insolvent pension programs fail. Incentives matter, and people must realize something that they can't depend on companies to make up the pension funding gaps. Most of all, we cannot too quickly terminate the moral hazard of people continually looking toward a federal agency to bail them out of their short-sighted decisions. It sounds cold-hearted, and perhaps I really am the evil capitalist bastard some accuse me of being, but it is immoral for government to prop up something for a relative (and irresponsible) few at the expense of everyone else. When will we stop treating every decision of life as backed by "the full faith and credit" of other taxpayers' wallets?

Instead of telling companies to fund the pension programs better, President Bush should be telling workers to fund their retirements better by saving more themselves. Then again, the message would be lost, for it would fall on the deaf ears of people who believe he's managing the economy poorly. The American people, remember, also thought his father was responsible for the 1991 recession, and they voted Clinton into office on his Big Lie of a bad economy (and NBER conveniently waited until December 1992 to report that the recession had ended in March 1991, 20 months before the election).

The economy was well into recovery then, and it is long past recovery today. We're in the middle of a full-blown economic boom, though there are always pessimists when it comes to stellar GDP and employment reports. The Financial Times, in early September, described Spain's 3%+ GDP growth as "robust." Ours can be downright stellar at over 4%, but big media has to point out the mythical bad news of excellent U.S. GDP growth. Then you have Harry Reid and John Edwards, whose lack of knowledge of real economics is equaled only by their lack of knowledge of what the Constitution actually says.

Reid talks about runaway federal spending, but the last time I looked, he was a member of Congress. Congress is the branch of the federal government that appropriates tax money and makes the final decision on how to spend it. Now, I have criticized the energy bill, which Reid voted against (though for the wrong reasons), but it's dwarfed by the transporation bill, which Reid did vote for. On his website, he claimed, This bill doesn’t raise taxes and it doesn't increase the deficit – the funds have already been set aside from federal fuel taxes." Of course the bill didn't raise taxes -- that generally happens when Democrats are in charge of Congress. And saying the bill doesn't increase the deficit is accounting worthy of Enron: "Oh well that isn't the deficit, it's all those other programs, just not that one!" The money on the bloated transporation bill could have been spent on something else, or returned to the taxpayers. So I will not hold my breath to hear Reid take his share of responsibility for the federal spending he blames President Bush for.

Reid is flatly wrong to insinuate President Bush is responsible for the trade deficit and that the trade deficit is a bad thing; read here for the explanation. He talks about "tax giveaways" as bad, when the actual term is tax cut, and the only "giveaway" is giving your money back to you. I guess he's another of those people who think you should "give more back to the government." Then he talks about the "health care crisis," which as I recently called it is belling the cat: it's easy to propose a fix, but who will do it? Who is going to pay for universal health care?

Finally, John Edwards, who had to join the presidential race, because his poll numbers for Senate re-election were so low! Back in March, I exposed his hypocrisy on how he says we should help the poor. He opposes free trade, which is critical to helping the poor on both sides. During the 2004 election, he supported meaningless "tax credits" that skew, shift and burden businesses, instead of encouraging them to produce more (which means hiring people, including the poor who are looking for jobs). Third, he combats poverty not by performing volunteer work or donating some of his millions, but by joining a center that studies poverty. On his first day, he moderated "a panel discussion on the importance of savings and assets in moving families out of poverty." Really, Mr. Edwards? I would have never guessed that the secret to getting out of poverty is to...gain wealth.

We shouldn't be so surprised that Edwards holds these views. The millionaire is so shielded from reality that he likely hasn't noticed the big drop in gasoline prices over the last three months -- hardly "out of control," much like Paul Krugman's infamously wrong prediction on inflation. Maybe they should co-host their own investment show on CNBC: when they say sell, I'll know to buy.



Anonymous Blue Cross of California said...

I hope Bush can work to improve health care conditions as millions lack coverage.

Thursday, December 08, 2005 5:06:00 PM  
Anonymous Standard Mischief said...

I wonder how you feel about the Schumer box on the back of a credit card application? It's basically a requirement that companies that offer credit cards to consumers, they must present certain data clearly in a little box so the consumer can compare rates. I really can't believe that I support anything that Chucky has done, but this is great.

Some people might tend to get all Ayn Rand-ey on me, saying a true free market will eventually fix everything, and they very well may be right, but I'm not sure I'm gonna live that long. Corporations are not humans and shouldn't have unlimited rights to lie or obfuscate offered terms, advertisements, or finance statements.

Protecting pensions? Not government's responsibility, but making sure they don't pull some legalese mischief is.

I don't support a bail out, but companies that can't or won't set aside enough to cover the promises they made ought to be fined.

Thursday, December 08, 2005 7:30:00 PM  
Blogger Perry Eidelbus said...

BC, I'm afraid President Bush doesn't have a magic wand to give everyone health care. Canada tried socialized medicine, and look where they are: they might get cheap prescription drugs, but many of their patients come to the U.S. for treatment. Many of their doctors come here looking for decent incomes.

SM, I'm very influenced by Austrian economics in my views of government and commerce. I believe the fine print is enough. People need to understand the ramifications of getting a credit card, and they need to have the intelligence to look at the rate boxes (which I've never had a problem analyzing). It comes down to people wanting government to reduce the risk in our lives, which isn't inherently bad, but it's at the cost of our freedom to determine our own destinies.

However, if a company hides certain information, that can invalidate the contract, because there was no "meeting of the minds" (which a valid contract must have). Outright fraud is also a situation where government can get involved. Free markets don't mean anarchy; they just mean the government stays completely uninvolved except to punish force and/or fraud.

Friday, December 09, 2005 1:08:00 AM  

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