The Babe Theory Of Political Movements.
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Iran's Sham Election In Houston.
June 20, 2005 5:36 AM
Yes, Kanye, Bush Does Care.
Oct. 31, 2005 12:41 AM
Health Care vs. Wealth Care.
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Americans Voting With Their Feet.
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Idea Majorities Matter.
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Twilight Zone Economics.
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The "Shrinking" Middle Class.
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From Ashes, GOP Opportunities.
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Battle Between Entitlements & Pork.
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Let Economic Freedom Reign.
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Biggest Health Care Moment In Decades.
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Unions Antithetical to Liberty.
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Right To Work States Rock.
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Social Security Reform Thursday.
March 13, 2008
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The Carnival Of Classiness.
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Mainstream Melee: Wolfowitz.
May 19, 2007
Pundit Roundtable: Leaks.
July 9, 2006
A WILLisms.com(ic), by Ken McCracken
July 14, 2006
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Social Security Reform Thursday: Week Forty-Five -- Defined Benefit Pension Plans.
Thursdays are good days for reform, because they fall between Wednesdays and Fridays. And reform is a long-haul process, not a fleeting event. So we're going to keep plugging along with the case for reform, even as the issue goes off the political radar screen.
That's why WILLisms.com offers a chart or graph, every Thursday, pertinent to Social Security reform.
This week's topic:
Defined Benefit Pension Plans.
Some thoughts from Milton Friedman:
At the end of World War II, government spending was 15–20 percent of national income. Then it went up dramatically so that by 1980 it hit 40 percent largely because of programs ranging from Medicare to environmental regulation to Social Security. From 1980 until 2005, it has remained static. We haven’t beaten the tendency or rolled it back. We’ve just stopped the growth. This is an argument that supports your thesis, I’m afraid.
A defined benefit pension plan (Social Security is one of those) does not and cannot meet its promises when it relies on a pay-as-you-go intergenerational wealth transfer (again, that's Social Security).
Ironically, one hurdle Social Security reform faces is public fear and confusion. We hear quite a bit these days about failing corporate pensions. And not just the blue collar union pensions, either. We're talking IBM, Verizon, Sears, Hewlett-Packard, Motorola, and many more large, well-established, well-respected companies in solid financial health, abruptly doing away with defined benefit plans, often to the disgruntlement of thousands of employees.
In other words, companies in good shape currently are learning lessons from the airlines and car manufacturers and other heavily-unionized industries (which once were, but now aren't, in good shape), and instead of hoping the problem goes away, are doing something about it before it becomes crippling (bankrupting, even).
The Center for Retirement Research at Boston College released some interesting data just this week, noting how prevalent the shift away from defined benefit plans has been in recent years in the corporate world (.pdf):
Some point to the trend in the corporate world away from defined benefit plans and toward defined contribution plans as proof that we need to keep Social Security "the way it is" in order to buffer the harsh realities of the global economy. As if that's an option, keeping Social Security "as it is."
Social Security is broken. There's no keeping it the way it is. It's broken mainly because it is so troublingly similar to those broken corporate defined benefit plans the corporate honchos are fleeing. Thus, without reform, we're looking at a serious lack of a buffer against the harsh realities of the global economy.
The factors that have caused the problems in Social Security, and the factors that have caused problems in defined benefit plans are eye-poppingly similar. Most obviously, the promises in both public and private defined benefit plans are made to an ever-growing number of people, all of whom are, on average, living longer than ever.
Meanwhile, most corporations are leaner and meaner than before. They have less currently productive workers.
Where have we heard this before?
America's present workforce, relative to the number of retirees, is shrinking every day as the first wave of Baby Boomers begins to retire and draw pensions and Social Security benefits.
More retirees. Less workers. It's not complicated math. At all.
The National Economic Council's Charles P. Blahous offers another striking similarity between Social Security and corporate defined benefit pensions:
The defined benefit pension system has often gotten into trouble because it has opaque accounting that overstates the assets that are really in the system and leads to a false sense of security about an employer's retirement situation. We have seen over and over again in the employer defined benefit world, you have these employees, and they go to work every day, and are told every year, year after year, that your pension is funded, or 90% funded, or 95% funded, and according to federal laws/regulations, it is.
The demise of defined benefit pension plans, far from being a weapon in the demagogic anti-reform arsenal, ought instead to serve as impetus for Social Security reform as soon as possible. Before it's too late.
It's time for reform.
The clock is ticking:
Previous Reform Thursday graphics can be seen here:
-Week One (Costs Exceed Revenues).
Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.
Posted by Will Franklin · 9 February 2006 12:53 PM
I admit my math skills are not the greatest... BUT even I can see the problem and figure out the longer we wait the worse off everyone will be!... I sure wish we had some people in Washington who wanted to do some real work! On real issues like S.S. reform!
Posted by: Zsa Zsa at February 10, 2006 05:47 AM
Unfortunately, the President's proposal would have given Social Security an entirely new set of problems, much like those faced by defined benefit pension plans.
Right now, many of these defined benefit pensions are severely underfunded. They can get away with this now, because they don't need to be paying out the benefits. But as soon as all these Baby Boomers start to retire, they're going to need to pay those benefits. And what these pensions are kind of banking on right now is the same idea that the President had for Social Security. You invest in the stock market, and you allow those gains to make up the difference. You know, so you're expecting these higher gains and these higher rates of interest that are going to make up the difference in the long run. Unfortunately, I don't think that's going to happen.
Because you've got these corporations with underfunded pensions using those pension assets to purchase stock in other corporations with underfunded pensions. You know, that doesn't make any sense.
And as the Baby Boomers start to retire, the problem will only get worse. It's going to turn into this vicious cycle, because you've got normal retiring people drawing money out of the stock market to pay for their retirements, then you've got these corporations who are counting on these gains, but suddenly these gains are now going to be less due to several factors. So that means the corporations are going to have to start coming up with more money out of their own pockets to pay these defined pension benefits. And as corporations use their profits to make up the difference to cover these pension liabilities, that's going to further decrease corporate profit margins and consequently stock returns.
So suddenly the next younger generation is going to say, "Hey, all these profits are being eaten up by these pension liabilities. Why should I invest my money in the stock market? This no longer seems like such a good idea." And this will only make the situation worse.
Can you see the vicious cycle there?
Posted by: Adam at February 10, 2006 05:50 PM
The entire United States government is a "pay-as-you-go" system, and it will face the same financing issues as Social Security when the Baby Boomers start to retire. Not only will these retired people be collecting Social Security and Medicare benefits, but they will also be contributing less in income taxes than they are right now. Meanwhile, the government can't even manage to balance the budget while these Baby Boomers are still working and earning.
By the way, Social Security is NOT a Ponzi Scheme.
Posted by: Adam at February 10, 2006 06:15 PM