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The Employer said, "To fix this problem we need to organize a committee, have meetings, and through process of continuous improvement, develop a solution."

The Fund Manager said, "No that would take too long, besides that method never worked before. I have my trusty pen knife here and will take apart the brake system, isolate the problem and correct it."

The Congressional Member said, "I think your both wrong! I think we should all push the car back up the hill and see if it happens again."

The car these three were driving in your pension. And although the fiduciary responsibility of those in charge of your pension has been in question before, nothing like the proposed postponement of a serious problem such as recalculating funding has had such long range consequences. The problem is nothing new. Some issue or another about funding has cropped up rather regularly for the last twenty years. But the far flung effects of the current piece of legislation headed for the President's desk, is, well, unprecedented.

Congress, for those who may not be aware, took over the job of watchdog of these defined benefit pension plans back in the 1974 with the Employee Retirement Income Security Act. The act itself was well intentioned but it has since been tweaked beyond recognition. A defined-benefit pension plan is basically provides an increased benefit for older workers, adding real value to the last ten years of employment. From an employer standpoint, the company funds the plan, putting up all the money. The worker, who views that money as more than a hollow promise of future benefits believe that their pensions are their property.

These plans have come under fire recently because of heavy gambles in the stock market which proved to be too aggressive. Companies and unions take the contributions made on behalf of their employees and members and invest them. There is a delicate balance between overfunding and underfunding which, when added to the ever growing pool of retired and soon-to-be retired workers, complicates the investment strategies of these plans. Too conservative and the plans will not have enough available cash for retirees. Too aggressive and the plan runs the risk of underfunding should the markets turn sour. Congress has understood this all too well as they have tried their hand at fixing the problem by making these subtle adjustments six times over the last thirty years, raising taxes three times.

The problem with a company sponsored plan is the inherent conflict of interest they pose, especially in years when the markets are flush with stock gains. Skimming those overfunded plans were used for profit fixes for struggling enterprises which in turn creates a problem in years when those investments fail to perform.

Fund managers proved to the world that they too were victims of human nature. As the markets slid, they, like many of us, sold stocks at low prices and in doing so missed a good deal of the upside rebounds in recent markets. This left far too many plans without a financial leg to stand on.

So, in steps Congress once again. The Pension Funding Equity Act passed by the House late last year, with I might add received administration approval, was tweaked by the Senate in such a way that the name of the Act itself becomes a misnomer. The change came in the way these plans were calculated. This, it turns out, provides little in the way of relief for many of these plans.

These calculations are currently based on the 30-year Treasury bond rate. Using this ultra conservative index meant that many plans were underfunded. By changing the indexed rate to follow the higher, and more volatile corporate rate, companies will be able to assume better funding even if it doesn't really exist. And it seems that no member of Congress can explain how removing money from a plan, to the tune of $25 billion (an estimate based on the last temporary law) or $80 billion (based on the old law) would make the plan better.

The likely and regrettable solution will be eliminating these types of plans altogether. Turning defined-benefit plans into defined contribution plans makes sense but has ill-fated consequences for employees who are at or near retirement. Changes in the plans at this late stage in a working career would change more than one retiree's benefit. Touting defined contribution plans as portable; suggesting that all workers would take the time to educate themselves; and assuming that fiduciary responsibility would suddenly blossom among employers eager to see that their employees investment strategies met with their goals will not happen. Evidence of this lack of understanding is rampant among the investments currently being used by lower wage workers who have a 401(k) plan available. Too often, they either contribute nothing or fail to make good long term decisions when they do pick an investment. That's not to say that education won't work, but right now, it has failed for too many current users of defined contribution plans. That will only leave another future burden on the horizon.

Employers should be forbidden to default on their current plans, possibly even closing them to future members until something can be worked out. But the current legislation, despite the threat of veto (which hasn't happened in the last three years and is unlikely to happen now), is a travesty of fiduciary responsibility. Somehow, when industry and Congress join hands, it is often the average worker who ends up paying the price. This time, the price will paid long after these "leaders" have left.

Today's Commentary: 02.01.04
Shock of Shocks - Reminding the Markets
My buddy Vince is convinced that there is no better time to buy gold. Always the alarmist, he saw three things last week, and I have to agree with him, that are most disturbing to a "rebounding/recovering" economy. We'll get back to the gold part in a moment.

First problematic tidbit was the results of the Federal Open Market Committee's mid-week meeting at the end of January. In it, the chairman Alan Greenspan and his distinguished board of governors decided, perhaps unwittingly but I seriously doubt it, to change the wording on the outlook for interest rates. While they intimated that they would keep those rates down, they weren't as believable as they were the last time they spoke in December. Calling the "upside and downside risks of sustainable growth for the next few quarters" as being "roughly equal" sent the markets, both the equity and the fixed income, tumbling. The comment seemed to indicate that the group was nonplussed by the tepid, or better yet, non-existent job creation, nominal inflation growth and less than expected GDP growth.

Laurence Meyer, former Fed governor was making the rounds prior to the outcome of the meeting, stirring the rabble with interpretations such as: "The change in language almost certainly carries a change in message". And the markets bit, hook, line and sinker. But shouldn't they have known better?

Inflation is rising somewhat growing at a paltry rate of less than 1% in December. This is probably the one number that worries these sage economists the most. The job market has not joined the party but Greenspan doesn't seem to mind as much since the current unemployment rate has created the illusion that there is productivity in its place. Probably most notable was the flat report on manufacturing. This was expected to continue to rise with a predicted increase of 2%. It has been duly reported that housing has supported much of the recent growth but even with low rates continuing, there are worries that this wellspring of investor and consumer cash is beginning to wane.

The question is more now when as opposed to whether in 2004. To do it in August might help the markets adjust to the tightening action. To do it before the election may expose the inherent weaknesses in the Bush economic plan. This governing body should be apolitical. Any moves after the election will look as if the there may be some political underpinnings for the decision. At the end of career, Greenspan is surely aware of the consequences to his legacy of appearing partisan now..

But the Mr. Greenspan will be testifying before Congress this week and his restraint will be watched very closely. The "good for the consumer" Greenspan should scold the lawmakers for their foolhardy and mostly illusory attempt at stimulus through permanent tax cuts. Mr. Greenspan has made it known, although not as vocally a the nation's top banker should, politics or not, that fiscal responsibility comes with those tax cuts.

Which brings me to the second thing that has Vince checking for change between the sofa cushions to by more gold. In a follow-up to our concern over the restructuring of investments at the Pension Benefit Guaranty Corporation (PBGC), the one piece of the puzzle was as yet unknown when that piece was written was what will Congress do, if anything to fix the problem? Well, they offered a solution to the serious underfunding of many of this country's corporate pension plans with a plan to bail them out all courtesy of the Senate, whose version is much different that previously proposed plans from the House. The Senate legislation would allow companies to change the way they calculate those outrageous investment errors made when their speculation in the markets fell onto bad times. Along with many millions of other investors, companies kept far too much money involved in the equity markets in the hopes that over-funding of the plans would lead to higher profits. The Senate bill makes those obligations, pension payments owed to current retirees and the promises made to future ones, look much smaller. The bill totals over $96 billion in relief of which 16% is directed specifically at airline and steel companies and unions. This does little more than put off for another administration what should be paid for today.

The recalculation of these plans, including the one outlined for unions does nothing more than continue to support a smoke and mirrors recovery. If this legislation passes under the pen of the President, he will sign it despite the chatter from the Secretaries of the Treasury, Labor, and Commerce, an ironic trio who also make up the board of the PBGC - whose own funding is in question and liable to lead towards a tax payer bailout.

The solution seems simple. Pass it on to the consumer now. If companies were not allowed to hide their plan's shortfalls, prices would rise to help fund those problems. The other alternative is to increase the deficit further, taking perfectly good money away from the White House slash "taxes and spend plan". Either way, we pay.

And lastly, Vince and I both heard the argument made by some talking head last week suggesting that the federal deficit is like a mortgage. His analogy was simple, Any banker would be willing to lend money to someone with good credit and steady income for the purchase of a home. That cost is usually calculated at 40% of the gross income of the borrower. So the problem is nonexistent because this country has simply refinanced their mortgage, which is now 40% of revenues. No problem. Right?

Douglas Holtz-Eakin runs the non- partisan Congressional Budget Office. Their report pointed an accusing finger at the proposed deficit as it rose to $477 billion this year, exceeding last years spend-a-thon by 20%. At this pace, this administration will be setting this country up to what Mr. Bush likes to call a "manageable" $1.7 trillion in debt. If you throw in the chance that those tax cuts become permanent, and that debt is added in the total, the deficit rises over the next decade to a sum approaching the $4 trillion mark. This will put extreme pressure on the world, the bankers for our "extended mortgage".

This has Vince hoping that gold gets back down to $350 an ounce. It should not have been rising in tandem with the stock market and he was getting more nervous by the day. Now that the metal has cooled off, he thinks that the rest of the markets, once they understand the danger in a rising interest rate, the long term downside to recalculating every financial problem at the expense of the taxpayer, and a President whose policies have brought nothing but financial sleight-of-hand to the Union, will eventually realize that growth as robust is not a continued possibility. That will, according to Vince, make gold the safe haven it was intended to be and he plans to bunkered down, surrounded in shiny safety.