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Government, business bad at keeping promise

Updated: May 3, 2013 12:14PM



Originally published: May 9, 2005

I admit it. I’m conflicted. I fly a lot, mostly United, and I’m always delighted to get the lowest fare. And because I fly so many miles each year making speeches around the country, I’ve developed great respect for the flight attendants, mechanics and pilots who make it possible to treat flying as casually as I do catching a cab.

Plus, I’ve always believed that a promise is a promise, whether it’s a matter of promised Social Security benefits or promised retirement benefits offered by an airline. So I hate to get cheap fares at the expense of airline employees’ long-term retirement security.

Yes, the carriers must stay competitive in this time of rising fuel costs. And the economy requires competitive flight schedules to function efficiently. But tell me this: How can Donald Trump’s companies have gone bankrupt twice in the past 13 years, and yet he still controls 30 percent of the equity in Trump Hotels & Casino Resorts? The Donald isn’t worried that a corporate bankruptcy will hurt his retirement. So why should airline employees worry?

It seems both the government and some businesses are doing a bad job of keeping promises to ordinary employees.

Where’s the truth?

I’m a believer in free markets and capitalism, and I believe the foundation of those institutions is integrity. That’s why I suspect something dangerous is going on when it comes to retirement promises -- private and public.

In the past 30 years, many corporations decided to put the responsibility of retirement saving and investing onto the individual worker. Original “defined-benefit pension plans” -- a corporate obligation and liability -- were replaced by “defined savings plans,” most notably, 40l(k) plans.

That is, your retirement income is defined not by your benefit, but by how much you save, and how well you invest.

Many defined-benefit pension plans continue to exist, and companies are required to have the money in those plans to keep their retirement pension promises to the workers they protect. Unless the company goes bankrupt. Then the Pension Benefit Guarantee Corp. will take over, but with severe limits on how much it will pay to retirees.

Currently the PBGC, which is funded by the nation’s existing pension funds, has a $23.4 billion deficit, while covering 34.6 million workers in more than 29,000 pension plans.

Many retirees from bankrupt companies find their promised pension checks cut in half, once the plan is taken over by the PBGC.

With so many corporate pension plans in trouble, who will be left to ante up more money to fund the PBGC?

Then there’s the promise of Social Security. We have the federal government telling us that Social Security’s “shoebox full of money,” in fact, is filled with worthless pieces of paper -- government IOUs. The government itself put the paper there when it borrowed our hard-earned dollars -- deducted every week from the paychecks of millions of Americans -- to build a surplus for our retirement benefits.

Now some backers of Social Security reform in the government propose that private retirement investment accounts have the option of investing in those IOUs along with stocks. And -- with a straight face -- the proponents encourage foreign central banks to keep buying an additional $700 billion of those same IOUs every year to keep financing our government’s deficits!

So are those IOUs worthless or not?

How about a little public debate on the merits of lifting the income ceiling for Social Security taxes above the current $90,000 instead of cutting (oops,”re-formulating”) benefits for those with higher retirement incomes? Isn’t it important enough to have a look at the tradeoffs and benefits, and a serious national discussion of the alternatives?

Feeling better

I’d feel a lot better the next time I step on a plane if I knew the pilots and mechanics and flight attendants weren’t worrying about losing their pensions. And I’d feel a lot better about America if I knew the government wasn’t going to renege on its Social Security promises.

The idea of private accounts is a distraction, not a solution. There’s nothing wrong with investing your IRA in the stock market. In fact, you should do more stock market investing, because over the long run, it’s a better bet than either government or corporate promises. And that’s The Savage Truth.

P.S. Please don’t write to me to point out the irony that if corporate America and the U.S. government don’t keep their promises it’s useless to invest in either of them. I’m still trying to figure out an answer to that one!

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.



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