Free markets and retirement security

With the impending bankruptcy of WorldCom, workers have even more reasons to worry about retirement. Enron had already highlighted risks in some pension plans, but most subsequent coverage has obscured the depth and breadth of the problem. More than half of U.S. workers didn’t even have pensions to be wiped out by market collapse. In addition, the share of workers who will receive less than half of their current income in retirement grew from 30 to 42 percent in the last decade. The business press to the contrary, the stock market is and never has been a sure path to secure retirement.

Enron’s employees lost money in part because they were deceived and handcuffed. Its auditors, who also had consulting contracts with the firm, had a financial incentive to sugarcoat information. Workers couldn’t sell their Enron stock before age 50.

Not to worry, says Republican stalwart Phil Gramm, just a few days before the WorldCom crash. The market is now aware of this problem. The New York Stock Exchange is demanding that corporations on its list hire independent directors. Corporations are bending over backward to provide comprehensive and honest annual reports. The market will punish firms that play games. Reforms aren’t necessary.

Enron and WorldCom-style fraud was probably rare even in the heady days of the high tech bonanza. The larger problem lies in the charades that go on between corporate managements and Wall Street brokerage houses. The Washington Post points out that even after admonitions to provide candid information, most corporate reports ignore bad news or blame it “on uncontrollable factors such as the weather, the economy, the stock market or government regulation. … There is precious little data and analysis on the key operating measures that executives themselves look at to assess the company’s performance – things such as inventory turns or the cost for each new subscriber. …”

Conservatives argue that the job of investment houses is to sort through this fluff so that clients can make sound investments. Brokerage firms that buy corporate image will fail in the marketplace. They are probably right in the long run, but all of us don’t retire in the long run. Right now many brokerage houses still have an incentive to join corporate CEOs in sugar coating information. The most influential firms enjoy many investment-banking relations with large corporations. Even if analysts’ incomes are structured to depend on the success of individual investors, the income of the firm itself is still partially sustained by investment banking fees. Of all people conservatives should be most attuned to the influence of the almighty dollar on institutional behavior.

Even utterly scrupulous industry analysts will have difficulty in many situations. They must rely on auditors still tied to the corporations they audit and on information provided by management. Those managements that can skillfully massage the news will continue to induce interest in their stock. The stock price will rise and analysts who don’t get on the bandwagon will look foolish. They may not last long enough to mutter, “I told you so” as the bubble bursts.

If pension funds are to become equitable retirement instruments, our corporate order must start by providing more equal information to all. Independent board members are a feeble start. A sounder course of action would be to require both worker and consumer representation on corporate boards. Workers and consumers have both the knowledge and the incentive to spot problems that can endanger the long- term viability of the firm.

The stock market, however, will always remain something of a crapshoot. Economist Doug Henwood points out that $10,000 invested in the market in 1937 would have yielded $250,000 thirty years later, while $10,000 invested in 1972 would yield $73,000 today. Social Security, a frequent target of conservatives, is on more solid foundations than the market. Despite reliance on absurdly pessimistic assumptions about overall economic growth, Social Security trustees can still report the system is financially sound for almost four more decades. Even at that point it would need only modest changes to remain solvent another four decades.

The stock market is still trading at a price to earnings ratio well above historic averages. For the market to deliver returns equivalent to 1937-1967, one must make heroic assumptions about either the rate of growth of profits or the price to earnings ratio.

If retirement income is to depend on pensions, workers must have options that include lower-risk, long-term annuities. Employers offering pension should be required to provide both some risk-free options as well as access to genuinely independent advice regarding risks and opportunities.

Secure retirement income requires a healthy social security system uncorrupted by risky privatization schemes. It also depends upon pension funds for all workers premised on equal information and opportunities for secure and less risky investments. The stock market is no magic bullet. A secure retirement is unlikely without some heavy political lifting.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net.