The $4.7 Trillion Pyramid: Why Social Security won’t be enough to save Wall Street
by Michael Hudson.
This article which is only available in the April Harper’s Magazine wants to know the REAL reason for Bush’s social security plan. First, Bush wants to create a boom in the Stock Market--actually a bubble. There is some thought that Bush wants to “roll back the New Deal.” Democrats point out that this plan is still a “federally mandated transfer of funds–whether its from taxpayer pockets to Treasury Bills as with Social Security, or from taxpayer pockets to the stock market as under Bush’s proposed changes–is still a federally mandated transfer of funds.”
Michael Hudson points out how pension funds have had a disastrous experience in the stock market. In the 1950's General Motors offered pensions, to be invested in the stock market, to its employees and many companies followed their example. By the 1960's stock market companies had excess cash from these pension funds. With this excess cash, companies started bidding up share prices as they started to “take over other firms.”
This article implies that the Stock Market became a great Ponzi scheme. A blogger at Salon.com
http://blogs.salon.com/0002007/2004/05/07.html also suggests that the stock market has become a Ponzi Scheme due to leveraged buyouts.
“The problem was that when companies went bankrupt–especially small firms–the collapse also wiped out the pension funds invested in those companies. Employees of such companies found themselves not only out of work but stripped of the money they thought was being saved up for their retirement.
“Congress moved to limit such behavior by obliging corporate pension funds to be run by arm’s-length trustees, although workers were still permitted to keep their pensions in the stock of their employers. To further protect workers, Congress created the Pension Benefit Guarantee Corporation (PBGC) in 1974. All corporate pension plans were required to buy federal insurance, through the PBGC to protect workers in the event of a failed investment scheme or corporate bankruptcy.”
So what’s happening today? The PBGC is in trouble because there has been so many failed pension plans including the steel industry, the airline industry and soon the automobile industry (GM). According the Harper’s article, last year PBGC collected $1.5 billion in premiums but paid out $23 billion dollars in claims!
Corporations, to enhance their bottom lines, underestimate the amount they expect their pension funds will earn in the stock market. This allows them to pay less to the fund. However when returns from stock investments inevitably fall short of projections, the companies fail to make up the difference–which they are supposed to do according to the law.
The problem is, if the companies were to put more into the funds, their bottom lines would look worse and their stocks would fall further harming pension funds. But without changes, the PBGC will “be forced into bankruptcy.”
Bush’s plan might save PBGC, for a while. But shouldn’t the problems with pension funds be a warning not to put social security funds into the stock market.
Putting funds into the market may produce a boom–or a bubble which will eventually collapse leaving Americans in trouble. The Harper’s article concludes:
“There is no denying that channeling trillions of Social Security dollars into the stock market would produce short-term gains. But once this money is spent, the markets are likely to retreat. That is what happens after a financial bubble. Then we will be right back where we are today, only much the poorer and with no guaranteed pension system for elderly Americans who will, of course, need guaranteed pensions more than ever as they watch their stock holding continue to shed value. Indeed many other countries are just now recovering from their own dismal experiences with what Augusto Pinochet and Margaret Thatcher called, ‘labor capitalism’ and Bush calls with no apparent irony, an ‘ownership society.”
“In the 1930's, John Maynard Keynes urged governments to run budget deficits in order to increase the economy’s spending power on goods and services. His point of reference was the ‘real economy’–the economy of production and consumption, of investment in capital and in the labor to operate that capital. Whereas Keynes spoke of governments priming the pump with public spending programs to get domestic investment and employment going, Bush now seeks to prime the stock-market pump with Social Security contributions. It is the next natural step from our real economy to the economy of dreams.”
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