Opinion

David Cay Johnston

Why ZIRP may mean zip

David Cay Johnston
Aug 31, 2012 16:59 UTC

How is your pension doing?

Even if you are not one of the 44 million Americans lucky enough to be in a private-sector traditional pension plan, you should care because if enough fail, your tax dollars will be needed to clean up after them.

Defined benefit pensions, properly funded, are the most economically efficient way to finance old age. Congress has failed since it enacted ERISA, the 1974 Employee Retirement Income Security Act, to impose rules to get the most benefit with the least risk out of traditional pensions. Instead, campaign-donation-seeking lawmakers have enabled rules that encourage the private pension system to shrivel and weaken.

In July the 100 largest company pension plans had their worst recorded month and now owe $533 billion (r.reuters.com/syf22t) more than they have assets to pay, the Milliman benefits consultancy says. Other consultancies have issued similarly dire reports.

The core problem has been too little money put into pension plans. Putting in too little money, as noted economist Martin Feldstein pointed out more than three decades ago, inflates stock prices by obscuring corporate liabilities for future pension obligations. This distorts current investment decisions and creates future risks for investors and workers when these pension obligations come due.

Pension funds come from workers, who set aside what would otherwise be current cash wages to provide for their old age. Not putting that money into the pension plan is a subtle, but widespread form of wage theft. Companies argue that they make funding estimates based on what the law allows, which is true. But then it is usually what the law allows, not venality, that is the scandal.

The victims of low-interest locusts

David Cay Johnston
Aug 10, 2012 16:00 UTC

Another financial crisis looms for U.S. taxpayers, a disaster likely to create even worse human misery than the mortgage fiasco that some of us warned about years before the Wall Street meltdown in 2008.

The crisis next time: collapsing investment incomes for older Americans as artificially reduced interest rates force them to use up their savings and drive more pension plans into failure.

Eviscerating the interest income of savers is the undeniable result of a long-running Federal Reserve policy to reduce interest rates, especially since December 2008. The Fed reiterated on Aug. 1 that it plans to keep interest rates low through late 2014. It says this helps to promote stronger economic growth and bring down the jobless rate.

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