You're Welcome, America
As the stock market has cratered over the last six months, many of us have taken the opportunity to point out how fortunate we all are that President Bush's effort to privatize Social Security failed. But while that effort failed, a similar and less publicized effort succeeded.
As the Boston Globe reports this morning in an important story, this past year--at the height of the bubble market--the Bush administration implemented a "new diversified investment policy" at the Pension Benefit Guarantee Corporation, the entity established by Congress to guarantee pension payments to workers when their companies go bankrupt. The PBGC collects premiums from companies with pension plans and then covers their pension obligations in the event the companies go under. Historically, the PBGC has invested conservatively, mostly in bonds.
But last year, under the direction of a Bush-appointee and former managing director of Lehman Brothers, the PBGC adopted a new investment strategy that involved investing heavily in stocks and real estate (with large investment management fees going to Wall Street firms). You really can't make this stuff up.
Though the most recent returns on the fund have not been released, analysts expect them to show heavy losses, just at a time when a number of large companies with pension plans are likely to go bankrupt. Peter Orzag, the current head of the OMB (and a person who advised strongly against this change in strategy last year) is reportedly very concerned about the health of the agency and its ability to meet its obligations to pensioners.
If you want to read something that's almost comically tragic in retrospect, read this February 2008 press release from the PBGC regarding its new investment strategy. Toward the end of the document there are a set of questions and answers. My favorite question, by far, is this one:
The hurricane has come and, thanks to the Bush administration, much of our insurance fund is invested in beach front property. You're welcome, America!
UPDATE: Josh raises an interesting, if somewhat conspiratorial point. The decision to tranfer billions of dollars of PBGC money into to the stock market coincided with a number of warning signs about the overall state of the economy and occured at a time when the Bush administration would have liked nothing more than to prop up the stock market and teeting Wall Street firms for just a little while longer (to postpone the inevitable reckoning until after the election). I'm not sure I'm willing to believe that this was a factor in the PBGC's decision-making, but if I were an investigative reporter looking for a big scoop, this is something I would look into, just in case.
As the Boston Globe reports this morning in an important story, this past year--at the height of the bubble market--the Bush administration implemented a "new diversified investment policy" at the Pension Benefit Guarantee Corporation, the entity established by Congress to guarantee pension payments to workers when their companies go bankrupt. The PBGC collects premiums from companies with pension plans and then covers their pension obligations in the event the companies go under. Historically, the PBGC has invested conservatively, mostly in bonds.
But last year, under the direction of a Bush-appointee and former managing director of Lehman Brothers, the PBGC adopted a new investment strategy that involved investing heavily in stocks and real estate (with large investment management fees going to Wall Street firms). You really can't make this stuff up.
Though the most recent returns on the fund have not been released, analysts expect them to show heavy losses, just at a time when a number of large companies with pension plans are likely to go bankrupt. Peter Orzag, the current head of the OMB (and a person who advised strongly against this change in strategy last year) is reportedly very concerned about the health of the agency and its ability to meet its obligations to pensioners.
If you want to read something that's almost comically tragic in retrospect, read this February 2008 press release from the PBGC regarding its new investment strategy. Toward the end of the document there are a set of questions and answers. My favorite question, by far, is this one:
Given that the PBGC insures pension plans that invest in equities, doesn’t the PBGC’s new 45 percent equity allocation represent a doubling down of risk? Isn’t as if a property/casualty insurer that is vulnerable to hurricane loss were investing in Florida beachfront real estate?The Bush officials running the PBGC, of course, quickly dismissed this rather obvious objection to the plan. But it's hilarious to me (in a tragic sort of way) that they included it at all.
The hurricane has come and, thanks to the Bush administration, much of our insurance fund is invested in beach front property. You're welcome, America!
UPDATE: Josh raises an interesting, if somewhat conspiratorial point. The decision to tranfer billions of dollars of PBGC money into to the stock market coincided with a number of warning signs about the overall state of the economy and occured at a time when the Bush administration would have liked nothing more than to prop up the stock market and teeting Wall Street firms for just a little while longer (to postpone the inevitable reckoning until after the election). I'm not sure I'm willing to believe that this was a factor in the PBGC's decision-making, but if I were an investigative reporter looking for a big scoop, this is something I would look into, just in case.
posted by A.L. at 10:54 AM
8 Comments:
"As the stock market has cratered over the last six months, many of us have taken the opportunity to point out how fortunate we all are that President Bush's effort to privatize Social Security failed."
No final plan emerged, but in proposals the equity option was not available to folks over 55.
If I were thirty years old today I would be thrilled to be putting my current retirement kitty into equities at these prices to be tapped 30-40 years hence. Any losses on the previous investments would be a small price to have paid.
And any such losses would have been my own fault - the equity option was always voluntary.
Tom Maguire
Tom,
The problem with investing social security money in equities is that it defeats the whole point of the system. Social security is meant to be fallback; it's social insurance. It's not meant to be a 401k. When you let it be a 401k (even a voluntary one), you have a situation where people who make bad investment decisions end up with no failsafe. Then the government has to step in and cover their losses. If you notice, the current GOP proposal for dealing with social security involves the government insuring against individual losses. By doing that, any upside (from the government's perspective) to investing in equities is lost. Moreover, the transation costs involved in allowing people to make individual investment choices with social security money (as well as the transition costs to the new system) dwarf any potential upside to structuring it that way.
Social security has been one of the most successful government programs of all time, virtually eliminating the problem of destitute poverty among the elderly. If you move to an individual 401k-like system you either 1) cost the government more money, or 2) expose people to the very risk the system was designed to prevent their exposure to.
Peter Orzag, the current head of the OMB...is reportedly very concerned about the health of the agency and its ability to meet its obligations to pensioners.
Oh, I doubt Orzag is all that concerned. I'm sure the Treasury and the Fed will print enough money to cover any problems. Then use this problem, if it actually is a problem, as an excuse to expand Social Security.
Then the government has to step in and cover their losses.
Why? Who says that is actually the right thing to do?
If you notice, the current GOP proposal for dealing with social security involves the government insuring against individual losses.
I didn't see that in the proposal from the other day.
Moreover, the transation costs involved in allowing people to make individual investment choices with social security money (as well as the transition costs to the new system) dwarf any potential upside to structuring it that way.
Only if the government actually runs it; politicians opposed to the idea (if it ever comes about) will artificially raise these costs to "prove" any attempt to do this a failure.
Where is the fiduciary responsibility of this entity and AIG.
AIG was trading CDOs(?) while ensuring the same trading items.
PBGC is insuring pension funds that are highly invested in the stock market, and is also playing the same market? Insurers playing the same markets that THEY ARE INSURING!
And while I am screaming about FIDUCIARY Responsibilty, hows about all those Money Managers who put their clients into Bernie's Ponzi Funds? It looks to me like fiduciary and due dillegence have lost all their meaning in the last 8 years.
Finally, if Bernie didn't do a stock trade for 15 years, it seems kind of obvious that the IRS didn't do it's duties either. No red flags for an audit or other processes? Think about that: supposedly Billions in stocks, and this guy never got audited.
"I'm always amazed by how willing conservatives are to believe their own lazy caricatures and, as a result, how completely and utterly they fail to understand the actual motivations and beliefs of their political opponents."
Sorry, that is from the GM post but is appropriate here.
It turns out (and this will be news to the reality-based) that the PGBC "adopted" the revised strategy but did not, as of Sept 30, actually implement it.
And since their stated plan is to adopt it gradually, it is very unlikely that they made a major shift after Sept 30, in the midst of the market swoon.
Tom Maguire
Here is Alan Krueger, ex-Princeton and now on his way to Treasury:
"The decision to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier but possibly higher-paying assets like stocks has been controversial.
The decision would have proved catastrophic had it been immediately acted upon because the stock market has fallen so far. Fortunately, P.B.G.C. has been slow to act on its new policy. By my back-of-the-envelope calculation, had the agency fully adopted its new investment policy at the start of last year, it would have lost around 12.2 percent of its assets by September 2008. Instead, it lost “only” 6.5 percent, or $4.2 billion.*"
Great research by Josh otherwise.
Tom Maguire
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AL, you should check this news story out:
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/30/AR2009033003291_pf.html
The stock market isn't the only thing that has been hammered by the economy.
The fact that this disaster is described by you as "most successful government programs of all time" speaks volumes about government.
You do know that correlation doesn't equal causation right? yes, destitution among the elderly has significantly declined but we are also a far richer country than back in the 1930s so that should be expected. You know, when my grandmother was growing up in the 20s and 30s they used to take the cloth from feed sacks and make clothes out of them. That's no longer the case and the government isn't responsible for that either.
Why am I not allowed to opt out of social security? Why do we need this restriction on my freedom? What do you think about the fact that if a company ran their pension system like SS that their CEO would be thrown in jail?
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