Promises, Promises
For the last several months, The New York Times has
run a series of fascinating articles on the problems that poorly funded
defined-benefit pension funds are encountering across the nation.
One of the more amusing articles was devoted to the
investment results of two separate pension funds managed on behalf of
the members of the Teamsters Union, which has long suffered from
charges of rampant corruption. Well written by Mary Williams Walsh, the
article described how one group of teamsters, whose fund was run by
successors to the late Jimmy Hoffa, placed its money in investments
like Las Vegas hotels, real estate and heaven knows what else. Retirees
whose pensions were managed by this fund were quite secure.
Another group of teamsters had their pension assets
managed by Wall Street firms like Morgan Stanley and Goldman Sachs.
Sadly, these pensions were experiencing funding issues associated with
poor investment results.
If much of the article‚s reporting was well done,
its conclusions were questionable. Again and again throughout the
series, equity investing was singled out as the reason behind all the
problems these pensions are encountering. Why were money managers so
dead set on investing pension funds in equities? According to The Times, it‚s because money managers can earn much more
on equities than on fixed-income securities.
It‚s correct that management fees are higher for
stocks than bonds. But while I‚m pretty cynical about the motivations
of Wall Street, I think there are legitimate reasons why many leading
academics, among others, have concluded that the optimal asset
allocation mix for pension funds is 60% equities, 40% bonds, with
tactical shifts of 10% to 20% either way from time to time based on
market conditions.
First, as the Wharton School of Finance‚s Jeremy
Siegel has demonstrated, bonds are more volatile than equities over the
long term. Many of us, including some pension officers, forget that
pensions are a long-term obligation. While the 2000-2002 bear market
undoubtedly reduced the flexibility some pensions enjoy, proper
stewardship could have avoided many of the current problems, most of
which are self-inflicted.
These problems include: 1) excessive return
assumptions of 9% or 10% prompting companies like IBM and General
Motors to underfund their pensions, 2) the use of overfunded pensions
to disguise weak operating earnings at companies like Lucent; 3) moves
by corporate raiders like Carl Icahn and Ronald Perelman to virtually
"loot" pension funds of their good assets and replace them with
very-high-risk junk bonds; 4) absurdly generous benefits at companies
like United Airlines where, according to one report, one flight
attendant claimed she had earned a pension of $140,000 a year before
her union was forced into accepting givebacks again and again.
Pensions are little more than promises and
liabilities based on the good faith and credit of a company. When
flight attendants are promised low seven-figure pensions, and top
management is told theirs will be in the high six figures and CEOs get
seven-figure annual payouts, why should anyone be shocked that
companies either can‚t pay them and/or are forced into bankruptcy?
I‚ve worked at five different companies in my life,
and none of them ever had a defined-benefit pension plan (several had
401(k) plans). For a long time, I felt rooked. After reading all these
stories, I now feel lucky.
Opponents of privatizing Social Security are arguing
that if professional pension funds can‚t succeed, what hope is there
for individuals? Not much, assuming individuals engage in all the
shenanigans the pros have.
While investing Social Security funds in equities
might be problematic from an administrative viewpoint, privatizing this
entitlement and letting individuals buy short- or intermediate-term
government notes could enable people to earn modest 3% to 5% returns
(far better than the Social Security trust fund), while helping the
government finance its massive deficits. It would get the liability off
Uncle Sam‚s books and give Americans a little more security. Right now
they trust the government about as much as they trust Enron or United
Airlines.
Evan Simonoff
Editor-in-chief
[email protected]
P.S. Please be sure to visit our redesigned Web site at www.fa-mag.com.
EDITOR'S NOTE
January 1, 2005
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