A Teaching Moment
Courtesy of Megan McArdle:
Big news in pensions today: Silverdex, a major US-based conglomerate with fingers in just about every economic pie, from mining to solar cells, turns out to have been stuffing its main pension fund full of … it’s own corporate bonds. For decades. It’s still not clear how this happened without anyone noticing, but essentially the pensions that current workers have been counting on for thirty years turn out to be backed by nothing more solid than the company’s promise to pay. Amazingly, when confronted by reporters about this behavior, a representative declared that this was a big fuss over nothing.
“It is perfectly legal to invest a pension fund in corporate bonds. That is what we have done. These bonds are backed by the full faith and credit of Silverdex, and it is defamatory to suggest that they will not be paid.”
Silverdex is still pretty profitable after all these years, but “defamatory” seems absurd; obviously, it’s quite conceivable that the firm will run out of money, and the workers will be left with no jobs, no pensions, and no retirement. Though no charges have yet been filed, a congressional hearing is scheduled for next week, and observers expect high-level resignations from the Pension Benefit Guaranty Corp, which regulates pensions, to follow.
And here’s the kicker:
I don’t really know how to say this, but sorry, I lied a little bit. I’m not talking about a private company at all, because of course, if a private company did this, it would be completely and totally illegal. Regulators would have shut this down decades ago and probably at least a few lower-level executives would have spent a little time in the pokey. Instead this is, of course, a description of how the United States Social Security “trust fund” works.
Except that there’s actually a difference between the Silverdex scenario and the Social Security system:
Let’s consider this analogy to corporate bonds more carefully, because reasoning by analogy from a US government trust fund stuffed full of US corporate bonds to a US government trust fund stuffed full of US government bonds is really popular. But if these two cases are actually parallel in the way that is implied, then a third case would also be parallel: a US corporate pension fund stuffed full of the bonds of that corporation. Call it the Silverdex Scenario.
Such a pension fund would, of course, be illegal. And for good reason: we recognize that it is not, in fact, a pension fund. It’s a promise by the corporation to pay its workers at some later date, not a funded pension plan. The company can call this anything they want—trust fund, pension plan, Ponzi scheme—but whatever we call it, we’d recognize it for what it is: a meaningless accounting fiction that does not in any way enhance the security of worker retirements. And if, say, Verizon tried to fund its pension plan this way, liberals would hit the roof. Because we recognize that a pension fund full of third-party securities is not, in fact, very much like a pension fund full of securities issued by the same entity—corporate or government—that owes you the pension.
[…]
In fact, hypothetical Silverdex workers are better off than Americans with Social Security accounts in one key respect: they actually have a legal right to get paid. Not because there are “bonds” in their “trust fund” but because the company made a legally binding contract to pay them. If Silverdex tries to stiff them, a judge will seize money and hand it over to the pensioners; if the company goes bankrupt, the pensioners are probably going to be near the head of the line of unsecured creditors.
Trust fund afficionadoes imply that this is somehow also true of Social Security beneficiaries, but it’s not. This has been black-letter law for fifty years, ever since the Supreme Court ruled in Flemming v. Nestor that the government can take away your benefits any time it wants to. You have no legal rights to your Social Security benefits; you enjoy them at the pleasure of the US Congress.
As McArdle concludes, there is such a thing as the “Social Security trust fund,” but “it’s about as useful as a chocolate teapot. It doesn’t make retirees more likely to get paid. It does not make it easier for the government to pay them. You can’t even cut it into pieces and use it for s’mores.” Any serious discussion of entitlement reform will take these facts into account, even if people on the port side of the partisan/ideological divide resist doing so until the very end.
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Comments:
Sep '12
Re: A Teaching Moment
Thank you Megan and Yousefzadeh! You both so clearly explained what is essentially one of the most morally bankrupt episodes in self-governance humankind has ever witnessed. What mystifies me is the overwhelming majority response to this, namely, "Who cares? I contributed so I'm entitled."
So how do we get through to people who won't believe what they know to be true, in the face of MSM resistance? That's the real question. (I gave up on the MSM around 6 years ago when I watched Dan Rather's special on Social Security. It was pure anti-reform propaganda designed to frighten seniors. And it worked like a charm.) So how to get through to low-info seniors that their SS amounts to nothing more than my generation's willingness to pay for it, which we're not going to do if we don't have jobs?
Apr '12
Re: A Teaching Moment
That is brilliant! That spokesperson makes a very, very good point in an entertaining way. I hope the Chinese papers pick it up and think it is real. Get The Onion onto it.
Why are the American people so ill-informed?
The governance for the government is shocking. It is why I respect Paul Ryan for speaking up and getting a plan that politicians, and it turns out the media too, hate too.
Even if this were Apple or Microsoft or IBM or GE, which are or were blue chip stock, it would be ridiculously high risk.
outside of the US, this government debt behaviour is seen clearly. China, Russia and the Middle East are working hard to take out the US dollar as the world currency.
May '10
Re: A Teaching Moment
Yet ah! why should they know their fate?
Since sorrow never comes too late,
And happiness too swiftly flies.
Thought would destroy their paradise.
No more; where ignorance is bliss,
'Tis folly to be wise.
Thomas Gray
"Ode on a Distant Prospect of Eton College"
Kudos to Pejman for another outstanding post.
Mar '11
Re: A Teaching Moment
Another great article from Megan McArdle. Ruthlessly honest.
We await the response of the Democratic party......
Oh, no, wait, nevermind.
Sep '10
Re: A Teaching Moment
This "trust fund problem" came into being because of the bi-partisan "reform" that Republican Bob Dole has been taking credit for. If the same bank robbers rob a bank numerous times and someone kept saying the problem was the missing money instead of the bank robbers, they would not be thought creditable.
The SS trust fund is just one mechanism the bi-partisan ruling elites have used to fleece tax payers. There are many others. The trust fund enabled politicians to disguise some of their deficit spending. It is not as if this was unknown by even semi-informed people since its inception. The conservative press remained almost silent about this for fear their GOP friends would be revealed to be every bit as corrupt as their Democratic counterparts. That is the real scandal here and not the missing money.
Dec '12
Re: A Teaching Moment
Ancillary factoids: so-called Social Security is actually thrice taxed. First, FICA payments are taxed as income (below the ever-increasing ceiling) at one's marginal tax rate as part of AGI, even though you don't see it in your net pay. Next, Social Security payments themselves are taxed (only 85% of it at the moment) at your marginal tax rate in retirement. Finally, there is the "inflation tax." Not only has the "trust fund" not invested money collected; the purchasing power of FICA payments has shrunken dramatically over the years. The FICA dollar I first paid in 1960 will have 13 cents worth of purchasing power when I receive it back as a SS payment. Great investment deal, isn't it?
Jan '11
Re: A Teaching Moment
Hmmm, some conservatives are saying that we need to appeal to the 'middle class' and to their concerns & aspirations, that we need to find issues that minorities, gays, singles could rally to - that may actually bind us together as a people. If only there was an issue that the Federal Government has mismanaged and misled the taxpayer about whose reform the GOP could "own". If only we could find such a ready made issue........
Edited on December 16, 2012 at 5:15pmJul '10
Re: A Teaching Moment
I will grant it is a slightly different way to present this, but it is exactly what many of us have been saying lo these many years. The whole scheme is a bust. There is nothing in the "trust fund" but a bunch of IOU's. If a banker had done this, he would be charged with embezzlement. Politicians get re-elected. I clearly recollect the democrat howl when the suggestion was made to privatize just a small part of the whole concept.
I understand politicians lie. Perhaps the plan ought to be to hold their feet to the fire when they do.
Jun '12
Re: A Teaching Moment
All this is true, however, there are other truths that need to be considered.
The average elder citizen is simply not going to believe that Social Security is in trouble until their checks stop coming. Until then, they will continue to hold on to the fantasy that the money they've paid into the system is still there waiting for them, like a little kid holds on to the fantasy of Santa, only far tighter.
A large part of this is because of the very loud megaphone of AARP, which gave over $8,000 to Barack Obama this year, and in total they gave four times as much to Democrats as to Republicans in the 2012 election cycle. AARP keeps hitting the "it's your money" line and pushing back against any real reform of Social Security in their TV ads, and the average elder citizen is swallowing it.
Jul '11
Re: A Teaching Moment
ConservativeWanderer:
A large part of this is because of the very loud megaphone of AARP, which gave over $8,000 to Barack Obama this year, and in total they gave four times as much to Democrats as to Republicans in the 2012 election cycle. AARP keeps hitting the "it's your money" line and pushing back against any real reform of Social Security in their TV ads, and the average elder citizen is swallowing it. ·
Trying to unravel the realities of SS funding and payments to seniors, by dint of a short or long-winded explanation, seems to fall on pre-deafened ears. There's almost no getting around the "it's my money" response, even when it's shown that they're receiving far more in benefits than they paid in, and it is current workers that are cutting the checks to them every month. It's easier to live in a fiction that's comfortable than it is to live in a reality that is uncomfortable, and also points out, uncomfortably, that the doofuses most seniors have been voting for are largely responsible for the largest trans-generational pass-thru tax in the history of history.
Jun '11
Re: A Teaching Moment
And yet, I never but never hear politicians admit this, aside from Paul Ryan who tried ever so gently and got ads about throwing Granny off a cliff. I hear intelligent people who should know better speak sincerely about how financial problems with Social Security are only a very long term issue because we have the trust fund. Apparently no one who is both intelligent and honest on this can get into a position of power. Because we are just that stupid.
I don't blame people for the "it's my money" response; I feel that way too. But the money ain't there. It was a lie.
Nov '12
Re: A Teaching Moment
Jeez jim, you got another tune in your jukebox? I think we all get it: the Dems and the GOP both suck on ice, and with precisely the same vacuum pressure.