Someone wrote me a message about this commentary talking about the “social contract.” I replied:
Something that the public doesn’t understand yet – the huge deficits that the government is running now means that we likely will not be able to get Social Security and Medicare when we retire. That money is going out now, mostly as tax cuts, military spending increases, and to the war in Iraq.
And there’s another factor at work. Companies used to provide pensions – the company sets aside money for the employee’s retirement. It’s called a “defined benefit” system. But in the early 80’s the government passed the 401K idea. That means that the employee is supposed to set aside the money, not the company. It’s called a “defined contribution” system. Some companies also put some money in as “matching contributions,” where they match some percentage of the money an employee puts in, but that is happening less and less often.
So where did that money go that used to be set aside for employee pensions? The great stock run-up started at the same time. (Because money that used to go to pensions was now reported as profits.) So in essence what happened was that all the pensions of people from then on instead went to the owners of stocks. (Almost all stock is owned by the top few percent of wealthy people.) One of the great Reagan tricks from the 80’s that people still haven’t figured out – employee pensions were instead handed off to the really, really rich.
And, of course, many employees are not setting aside enough money in these plans – 401K plans are usually only in larger companies and IRAs don’t let you put very much away – for their own retirement. Not to mention the amount of money in 401K plans and IRAs that went away in the crash. So along with the problem of the deficits risking wiping out the government’s ability to pay our Social Security and Medicare, few people are saving enough to provide for their retirement.
BUT WAIT — there’s more. Those companies that DO still have pension plans are in trouble. During the stock boom the value of their pension funds was going up, so they stopped putting money into the pension plans. And then the market dropped, and the companies found themselves way short of what is supposed to be in the pensions plans and do not have money to put into the plans to make up the difference. This is called “underfunded” pension plans. If you go to Google and search for that, you’ll see what’s going on. (Really, look at a few pages of the Google listings.)
This problem is so bad that several large companies are technically nearly insolvent, if they had to report this shortfall. But the government is doing a few things to keep this under wraps because of the damage this could do to the economy. Currently the government is allowing these companies to pretend they are getting 5%, 6%, even 10% return on their pension holdings, as a way of letting them off the hook until things get better. But, of course, they are not getting that kind of a return right now. AND when they have to put money into the plans, this money comes out of profits, so these companies will see their stock values drop, and this will bring the market down more, which means they are even MORE underfunded in the pension plans…
Several state pension plans are also in trouble.
“As of last year, 79 percent of state pension plans were underfunded, up from 51 percent in 2001 and 31 percent in 2000, according to a survey of 123 state plans by Wilshire Associates of Santa Monica, Calif.”
It really, really does matter who you elect.