PENSION REFORM = WALL STREET WELFARE

Cloaked in language that makes it appear to be the savior of private pensions, the new pension reform law will actually accelerate the move away from traditional pension plans. In addition, it will increase brokerage profits, increase short-run top executive bonuses paid on the basis of stock prices, and increase the long-run risk faced by average Americans.

To understand these issues we need to understand the contents of the bill and how pension funding is measured:

First, the bill will require company based defined benefit pension plans to be 100% funded in seven years as opposed to a 90% funding requirement. Although this sounds good there are two issues which make this a problem. The first issue is that full funding is based upon actuarial assumptions regarding inflation, interest rates and wage growth. These assumptions change and the level required to be fully funded changes based upon the market value of the assets in the plan. Some plans which were under-funded 2 years ago are fully funded today due to stock market growth. This means that some firms may never have to put a dime into the system. The second issue has to do with the fact that other firms are severely under-funded and, as a result of the funding requirement, will just give up the plans that they have.

Second, the bill expands the amount that may be placed into 401k and IRA retirement systems. The increase in funding to IRA’s and 401k’s, combined with the few firms increasing their defined benefit funding, will lead to increased short-term demand for stocks on Wall Street. This increased demand will drive up stock price regardless of company performances. The increased prices will benefit those who already own stock and will provide huge bonuses to corporate executives, the Bush constituency, whose incentive pay is based upon the valuation of their company’s stock. This increased demand will also lead to more transactions through brokerages and increased commissions to brokerage firms.

Third, defined benefit plans pay workers a pension based upon their earnings in the latter working years and the number of years of employment. This is a known amount and is not subject to fluctuations in the market. IRA’s and 401k’s allow either withdrawals or the purchase of annuities based upon the value in the plan at the time of retirement. IRA’s and 401k’s are invested in securities that are subject to the vagaries of the marketplace. If the market is down and interest rates are high, as we saw in the 1980’s, many people will find that they do not have enough money to retire. Cash balance plans, that many firms are using to substitute for defined benefit plans, are subject to the same market forces. The result is the shifting of risk from employers to workers.

The result of the supposed pension reform is a reverse Robin Hood effect of "taking" risk from the rich, who can afford it, and "giving" it to the poor who cannot survive it. Again the USA accelerates toward third world status.