November 03, 2005

Pensions, Socialism, Catastrophe

Over at Tapped, Ezra Klein points out that, as the Pension Benefit Guaranty Corporation starts bailing out more and more troubled companies by taking over their pensions, it will start controlling more and more stocks, which means that Congress will technically "own" a greater share of corporate America. Bam! Instant socialism! He also points out that privatizing Social Security would have had a very similar effect—if Congress could choose the index funds in which workers invested—thus "potentially wreaking all sorts of havoc."

Interesting thought, though it's hard to see how worried we should be about all of this. Here in California, the two big pension funds—CalPERS ($180 billion) and CalSTRS ($125 billion)—have, under Angelides, engaged in a limited bit of activism, dumping tobacco stocks and the like, but it never seems to go anywhere. Divesting doesn't have much effect on a company's share price. On the other hand, a government-run pension fund could acquire enough shares in a company to influence the vote on this or that. Maybe this is cause for concern, though I have a hard time believing that activist pension-funds could do any more damage to the economy than hedge funds that regularly buy up shares of a company, tip the vote in favor of bad mergers, and then reap the profits at the expense of shareholders—as probably happened with the Compaq-HP deal. So I'm conflicted. William Greider's "The New Colossus" made a decent case for activist public pension funds like CalPERS, but there also won't always be progressive activists at the helm, obviously.

At any rate, reading Roger Lowenstein's "The End of Pensions" reminded me of yet another way in which America's pension problem is related to Social Security privatization—or any mandatory savings plan. For years, many companies have been predicting wildly optimistic rates of returns for their pension-fund stock holdings so that they could scale back contributions to the fund and use the cash for other purposes. Which, in turn, drives up the price of their own stocks, many of which were held by... pension funds. Can we all say "Ponzi"? Right. But the system's falling apart now that those rates of return have failed to materialize, and there's no way out for corporate pensions, which are under-funded by some $450 billion.

The Bush administration, to its credit, wants to tighten the rules for pension funding. But if firms were required to set aside even more money for pensions, many might go bankrupt, or stock prices might decline, which would in turn further endanger pensions, and on and on. Conversely, if the PBGC started bailing more funds out—with taxpayer money—that would only increase the "moral hazard," causing more firms to make risky investments. Either way, disaster. One conceivable exit strategy, then, is for Congress to create mandatory savings accounts for all workers and hence pour all that taxpayer money—or the Social Security Trust Fund—into the stock markets, creating a bubble which could help some of those rickety pension funds out. It's not clear that this would actually work, though. So disaster's probably inevitable, unless someone dreams up a clever exit strategy.
-- Brad Plumer 6:33 PM || ||