Train Wreck of the Week

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Train Wreck of the Week
By Bob Chapman

November 13 2005

Will your pension be there when you are ready to collect it? The answer is maybe. For corporations in this new world of offshoring and outsourcing, pension benefits are very difficult to change, short of bankruptcy. Most corporations have not adequately funded their programs and, over the last few years, gains from stocks and bonds have been inadequate to fund these obligations. Most funds were planning on 9% to 10% returns and that for the most part hasn’t happened. In addition, workers were supposed to die between 65 and 70 years old. That is no longer true. We are living to 78 to 82 now. Pensions are a problem, a $2 trillion problem. Investors lost $8 trillion in the collapse of the stock market in 2000 and 2001. It could be they’ll lose that much again in the coming correction. $6 trillion could be lost in the coming real estate correction; $4 trillion is possible in bonds. $18 trillion is lots of money, especially for people whose earning years are over.

Corporate and government pension plans are massively underfunded. From the corporate side there is no excuse for under funding. These corporate creeps have already put the taxpayer funded Pension Benefit Guaranty Corporation under water by $30 billion. The fund is supposed to be self-funding via corporate assessment, but that is a cruel joke. As we said often before, the S&L debacle cost taxpayers more than $500 billion, which we predicted two years before it happened, and we tell now, the pension fiasco will cost us over $1 trillion and that doesn’t include a 1/2 to 2/3 cut in Social Security benefits. The PBGC has created moral hazard in which the insurance may end up bankrupting the system it was intended to save. Corporate America, since the 70s, has been complicit in accommodating unions with benefits tomorrow rather than wages today. Neither corporations nor unions cared because if the financial load were too great, the taxpayer would pick up the bill. Recently bankruptcy declarations have put the PBGC some $30 billion in the red. As bad as the situation with corporate America is, the problem of state and local government pensions is even worse. They are under funded by at least $500 billion. Some of these problems have already begun to manifest themselves, such as in San Diego where pension abuse has bankrupted the city. Over the next several years many more public entities will follow. Soon every community will have contracted the San Diego disease. What is resulting is that both business and government want out of the pension business altogether. The Alaska legislature now denies pensions to future employees. Corporations are leaving the system, either by paying off their workers and terminating their pension plans, or by freezing their plans. Some employees are no longer accruing benefits and new employees will not participate at all.

The modern concept of pensions began in the late 1800s in Germany as pensions began to appear for police and firemen. We are now about to reenter a pension Dark Age that people will work until they die. If they become ill, for now, there is Medicare and Medicaid, which will follow pensions into oblivion. We will then revert to a system where the family will have to take care of is own. A system that had its shortcomings, but worked well. In 1980, about 40% of the jobs in the private sector offered pensions, today it’s 20%.

At the heart of the pension debate is the rate to use in calculating pension liabilities. The law lets corporations’ smooth changes in their asset values. If funds fall due to investment non-performance, they do not have to ante up fresh funds to compensate for the loss for five years. If that isn’t unsound accounting we do not know what is. In theory Erisa discourages under funding by requiring offenders to pay higher premiums, but loopholes render the sanction worthless. If companies over fund they can skip future contributions even if later they become under funded.

Changes in corporate pensions are on the way, but they are more punitive toward corporations, so many more corporations will shut down pensions. It has proposed premiums to the PBGC be raised from $19 to $30 a month. Seventy percent of company ratings today are close to or are junk ratings. Many politicians want to give such companies lenience, which simply continues moral hazard. Realities have to be dealt with.

Almost all public pension plans are underfunded, some by 80%. They are not covered by the PBGC. It will be interesting to see how these pensions are handled. Some employees after 30-years will get 90% of their final salary. For a commander in a police department that is $100,000 a year. In faltering San Diego six board members are accused of making a deal to let City Hall underfund the pension system in return to agreeing to higher benefits for themselves. Explicitly or otherwise, this is what unions and legislators have been doing all over the country. That is conflict of interest and it’s a felony.

Governor Schwarznegger in California tried to move pensions to a 401(k)-style defined contribution plan for new employees, but the legislature refused to accommodate. Michigan has closed its pension plan to new employees. Florida, Colorado, South Carolina, Arizona, Ohio and Montana are letting employees choose between defined contributions and traditional pensions. As an alternative there is cash balance plans, which are portable. They can be taken from one job to another.

Forty-four million are covered by private-sector plans and half are already retired and are collecting benefits. Only 50% of active employees support the entire system, which means in 30 years the system will die a natural death because it was actuarially unsound in the first place. Even if plans were turned into annuities there supposedly guaranteed payout is at the mercy of the vicissitudes of the market. If annuities cannot make the payout, state legislators can legally change it.

Today the average male lives to be 78 years old and the female 82 years old. We expect those figures to be 83 and 88 within the next 10 years. There are those who believe the aging process can be slowed as well. We agree with them. That means there isn’t a hope of pension plans coping with the financial demands under the best of circumstances. The answer, of course, is no one retires and receives benefits until they are 70 years old starting with today’s 62 year olds, and that is just for starters. Each year corporations and congress will have to readdress and update the system. People had best immediately start their own retirement plans because if they don’t they’ll end up indigent. Defined benefit plans are on the way out and will be extinct in several years. Those of you over 50 will get the shaft, and those under 50 can plan for the future. If you want to retire with a $3,000 a month income you’ll have to have $500,000 in US government bonds or something that will return that safely. You are going to have to depend on yourselves. You can’t believe government and corporate promises – you have to depend upon yourself.

George Bush left Mar del Plata empty handed. He should have stayed home. The visit badly damaged his reputation. It showed the deep-seated animosity latent in Latin America toward the Bush administration, but they do not harbor any negative feelings toward the American people. The bottom line is the neocons have brought little new to the table to re-ignite talks. The sticking points are US farm subsidies and the fear these smaller economies would be overwhelmed. Almost all countries said they’d renew talks, which means little.

The pact that Bush has maintained would help reduce poverty and boost economic growth has drawn vehement opposition from some leaders who say it would exacerbate large economic disparities across the region. Five countries refused to take part in the negotiations, Brazil, Argentina, Venezuela, Paraguay and Uruguay, which rendered the FTAA negotiations worthless. The game isn’t over, but Latin America won this round. What they won was time. Most nations don’t have the oil revenues that Venezuela has so they cannot be as strident and hesitate to alienate anyone much less the US. All of Latin America has voted populist or socialist because the US has forced them to do so. Brazil wants a much better deal. Chile just wants to get along – they could go either way. That could change for the worse in the near future, as Lula is unelectable in Brazil due to recent scandals. We don’t believe Argentina, Venezuela and Uruguay, under their present leadership, will ever join FTAA. Even the elitist Zogby Poll has 80% of Latin America anti Bush and in Argentina and Brazil it is over 90%. The latest US moves militarily in Colombia and Paraguay have South Americans very upset. The US is putting military troops all over South America certainly in anticipation of starting real trouble as they have elsewhere. This situation is grave because they don’t have enough troops for Iraq. The South American distribution of US troops and mercenaries have to be very important to the neocons to spare the personnel. We believe they are going to ferment warfare if they cannot get FTAA by diplomatic means. That means the South American countries should be training and expanding their militaries and arming themselves to the teeth.

South and Central America and Mexico do not want to lose their sovereignty, especially in the Andean region. They are very receptive to Hugo Chavez’s call for financial independence from US and international elitist corporate interests. These people have been exploited for over 500 years and that is about to end. In Bolivia, Evo Morales is as outspoken as Hugo Chavez is, and he joined Chavez at Friday’s stadium rally to protest Bush and FTAA. He said he wants to nationalize oil and natural gas and that is fine as long as its owners are compensated. As you know this happened in Mexico year’s ago. Chile is playing both sides and it will cost them in the end.

With NAFTA both Mexico and Canada have found it’s not a two-way street. It is the rules according to the Bush neocons. Internationalist, transnational corporations, many of which in tandem with other integrated monopolistic enterprises, dictate prices for goods, want to dictate prices for natural resources and want everyone to work for slaves’ wages as they become richer and more powerful and we become poorer. This administration wouldn’t know a level playing field from a turnip patch. The corporations like it the way it is, as do the rich of other countries. It is not only Americans who are losers, but also citizens of all countries. The field of course from a nationalist’s point of view cannot be really level. If it was the US would collapse and that is where it is headed. If we thought for a minute free trade would help everyone, we’d be for it. The US is too highly leveraged and the only way America can now protect itself is via protective tariffs. If it is not done the economy will collapse and that is not in anyone’s best interest.

As Mexicans well know, NAFTA has been a bust. If it had been successful over the last 11 years 10 million would not have had to become illegal aliens. Who wants FTAA after seeing how Mexico got shafted? Only the international conglomerates and the wealthy made out. Maqueladoras may provide employment, but we class them as slave labor camps, just cheap exploitative labor. Latin nations who join CAFTA and FTAA will all end up like Mexico. Part of the problem is that the media won’t report the truth, so Americans do not know what Mexico and our Latin neighbors and friends already know. The failure to foist FTAA at the Summit of the Americas and the demonstrations were a glorious reflection of free people who refuse to be bamboozled by elitists.

Fortunately, as long as George Bush and the neocons run America in an arrogant, belligerent and bellicose manner, the polite, conservative family oriented Latin Americans will never sign FTAA. Bush is the focus of their anger and this is justified, but don’t take your eye off the ball. He is just one emissary of a conspiracy for world government. Latin America should look ahead to when the neocons are gone in 39 months and get ready for a continuing battle for sovereignty. There will be another illuminist behind him that won’t be easy to hate. The problem is free trade and globalization, which is in the neocons best interest. George Bush has made it easy to reject FTAA. It is not easy to find an administration that allies with dictatorships, oligarchies, who tortures innocent people, uses secret assassinations sometimes of duly elected world leaders, allows kidnapping anywhere in the world and indefinite detention and meddles in wars and sanctions worldwide. He is reviled and scorned all over the world, but again focuses on the mission, which is an end to free trade, globalization and one-world government.