RESHAPING THE FUTURE OF OWNERSHIP
by Paul Petillo
American Reporter Correspondent
PORTLAND -- The term "Ownership Society" has resurfaced, recently wrapped in the President's talk of Social Security reform. The approach so far has been familiar as he portends a looming crisis in the future of this New Deal program. While his numbers may be suspect, the immediate need for change debatable, and the timing wrong, expect Mr. Bush to push his agenda forward in what could be the only year of his second term that he might have a chance at significant reform.
What this President is about to redefine will change the future of millions of Americans, many of whom can little afford the shift in the status quo. The reshaping of the future of retirement is taking place on numerous fronts, none of which seem very appealing.
These future owners that Mr. Bush speaks about would live in a world where society has control of its own destiny and with that control, he believes, the face of American retirement would be improved. While there is little evidence to prove his assertions, the President is moving forward.
Social Security system is often thought of as the most steady among the three legs of retirement. The other two legs are less tangible and largely in our control - personal assets and retirement savings in company sponsored plans or employee directed plans. The later two are, according to the commerce department, lagging far behind where they should be. In fact, 70 percent of the population over the age of 50 has amassed only $50,000 towards their retirement.
Expect the first change in Social Security, the warm blanket by the fire at the end of a long career to be the retirement age. Benefits will not be yours until much further down the road if the program changes. Pushing retirement year eligibility further into the future would help somewhat but will not in itself shore up structure of Social Security, a program whose real problems will not begin until midway through this century.
Nonetheless, you will be asked to wait for that first benefit check a little longer. This extended wait will come at a time when most workers struggle with a marked decrease in productivity, especially among those whose economic pursuits may have been more physically taxing. These changes are not being asked of you based on your physical ability to work beyond the current retirement age but upon estimates of longevity that even actuaries discount as unrealistic.
And that check, when you eventually become eligible, will need to be less as well. Cutting those benefits will largely be for the appeasement of those who don't believe in the ability of the program to provide for them, namely the younger worker and those who are mutually excluded by wealth. These sacrifices will not be the only concessions workers will be asked to make. As Mr. Bush's plan moves towards that inevitable conclusion, many retirees have become focused on another issue: coaxing those work weary muscles into motion each morning for several years longer than anticipated.
At the heart of the administration's proposed change in Social Security is their own belief that good faith and credit of the federal government is no longer good enough for the Social Security program. For years, they have been placing IOUs in the program's coffers as they siphon the surpluses for other uses. These IOUs are Treasury notes, the same type of bond we sell those Chinese and Asian investors by the boatload.
How this message is received by these foreign investors is unknown but it does have market watchers here at home growing more anxious each passing month. Fixed income investors have been watching the steadily increasing interest rates - expected to continue at this week's F.O.M.C. and probably until the Greenspan gang hits a consensus target of 3.75 percent , our slowly falling dollar - which could unhinge the growth of the global economy, and deficits of worrisome size - which continue to grow unabated. There is the prevailing hope that foreign investor won't notice.
Curiously, this anxiousness plays itself out every month. The report on foreign investor sentiment is released each month from the Treasury Department. While not new, it is perceived as an increasingly important indicator of how well the world views our economic decisions.
Wall Street views any reform to Social Secuirty, especially one that would create a partially privatized program as manna from heaven.
Historic comparisons of performance will be tailored to make the stock market look as if it was a sure bet to save the individual from a soon-to-be bankrupt system. Armed with success stories and track records of dubious performance, the average person, they hope, will be swayed into believing that the changes proposed by Mr. Bush will be not only good but will create a more secure retirement for millions of Americans.
Unfortunately, there is more retirement risk here than meets the eye.
Wall Street, who has expressed the continued desire for lean and slightly underemployed industries, has pushed business to change their leg of the retirement stool as well.
Mergers and acquisitions - M&A in the lingo of my trade - will begin to change the face of pensions in 2005 in a dramatic and somewhat insidious way. The M&A activity is the real bread and butter for Wall Street and if December was any indication, corporate marriages will be increasing in 2005. Not since 1999, when the inflated prices of equities created currency better than cash, has so much of this activity taken place.
While industry consolidation seems like a good thing for shareholders, in an ownership society, two things happen. The first and of least importance is the inflated cost of the company merger. Creating a larger entity does not always increase the underlying value as it reshapes the share price. And secondly, the reason for the share price change - usually an increase - is not the sudden realization that the new company will somehow be better able to price their products, operate more efficiently, or be more nimble in a changing world. Instead, the newly formed company will be better able to jettison or restructure their under funded pension plans obligations.
The new game played by these companies involves the legal dissolution of subsidiaries within the larger corporation, effectively removing any pension liability of the previous entity. Miscalculations of duration, an insurance term that helps estimate how well the plan is able to distribute benefits and for how long, as well as poorly diversified portfolios have turned many pensions from bankable, reportable profits to drags on the financial statement. This makes for a very enticing incentive for continued M&A activity in an uncertain world full of unpredictable pension liabilities.
These pension woes are expected to accelerate even as the markets improve. If these plans are not dissolved through M&A activity, they are bailed out by the Pension Benefit Guaranty Corporation, an insurance policy for pension plans.
The PBGC, which is often erroneously compared to the Federal Deposit Insurance Corporation or FDIC, a program that protects the nation's savers, is facing financial difficulty of its own. (The difference lies in the open disclosure of coverage provided by the FDIC for savers, up to $100,000. PBGC uses confusing rules to determine their obligations which can be found at the bank agency's Website - www.pbgc.gov/news/press_release/2004/pr05_14.htm#chart). This spells further disaster for those about to or currently retired.
The current premiums collected by the agency, about $19 per employee, are predicted to fall short of future obligations. The ability to simply jettison pension obligations in the face of financial difficulty has increased the call for better pension disclosure. It is debatable as to what if anything disclosure would accomplish. A better informed employee would have little recourse if the plan was revealed to have serious actuarial flaws and/or was poorly diversified.
The real danger lies in the attractiveness of simply dissolving pension obligations. If struggling industries see this as the cure for their own hemorrhaging plans, PBGC would be in serious trouble.
Some of the suggestions to change how PBGC operates would not benefit the employee or the future retiree. Raising the premiums of member companies would help in the short term. Charging higher premiums for riskier plans would, on the surface seem like a good idea as well.
That may have the negative effect as companies are encouraged by shareholders to attempt some sort of pension restructuring changing plans from defined benefit to defined contribution, which would dramatically change the retirement outlook for older workers. The other less desirable option would be to sell unwieldy subsidiaries whose plans have become cumbersome effectively dissolving the plan altogether.
Increased transparency would not give workers a feeling of well-being as suggested Labor Secretary Elaine L. Chao. Along with an increased premium, two additional proposed rule changes would have companies issuing health reports on their plans containing both short term outlooks - if the pension were to fail today - and long term views - how the pension is expected to fair with its current investment style, costs of administration and management objectives.
Which makes the appeal of M&A even more enticing. The current belief among CEOs is not growing a company for the long term but rather creating an entity that can morph, even dissolve into something wholly different while shedding its past liabilities like a snake does its skin.
The winners will be easily identified. Wall Street will benefit from increased banking activity. The changes in pension obligations and plan administration will shift even more business to the financial district in the shape of 401(k) plans. This will further inflate the equities market as new money buys into already expensive stocks.
Equity prices will get an added boost if the changes that Mr. Bush is actively endorsing about Social Security, the golden ring on this retirement merry-go-round, the rainy day fund once thought to be untouchable, are turned into reality.
The losers will just as easy to spot. The true victims will be the average worker. As the underlying reasons for ownership become apparent, she/he will be forced to face the facts. We will be the ones who have control of the the third and final leg of that retirement stool.
In an ownership society, we will be obligated to take control of our future. So far, we have not done very well. With recent Commerce Department reports pointing to a lackluster savings rate of 0.2 percent, we are not saving enough for a future that is being dismantled before our very eyes.