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.