Thursday, August 04, 2005

The NY Times recently published a story referring to the $6.8 billion bailout the federal government will be providing to the United Airlines pension that recently defaulted.

A couple of points seemed interesting to me. First, the default did not seem to be due to any large scale malfeasance (unlike, say, Enron or Tyco). Rather, it simply managed its funds the way many pensions do. The article said:

"United's actions offer a typical example of how most companies manage their pension funds. Its portfolio may look aggressive in hindsight - including high-yield bonds in companies like Adelphia and Bethlehem Steel that eventually went bankrupt, technology stocks that evaporated when the bubble burst and an assortment of private partnerships.
But the general approach was in keeping with what most companies do: about 60 percent stocks, 30 percent bonds and a mixture of "alternatives" including real estate and private equity investments. Local governments often invest their pension funds much more aggressively."

This scares me. A massive default based on business as usual? It seems to me that pensions should be invested in much lower risk ventures.

The second thing that struck me about the article was the level of regulation. The article said:

"Pensions are heavily regulated," Mr. Siedle said, "yet it's a kind of funny regulation where the regulators who are responsible for pensions really don't know much about managing money." Thus there are rules to make sure that pension plans are not really tax shelters in disguise, rules to make sure companies treat low- and high-income workers equitably and, since 1989, rules to keep companies from taking money out of pension funds and using it to run their businesses. But there is no rule limiting aggressive investment strategies or requiring companies that want to pursue them to pay more for their pension insurance.

I know many would like to say that government regulation should be curtailed, but it seems to me the lesson to be learned is not to have less regulation, it is to have better regulation.

Does anyone else see any analogies to the current Social Security privatization debate?

No comments: