Learning from Enron

by David Moberg

In These Times magazine, April 2002

Conventional wisdom in the '90s said that if you put your money into stocks, you could get rich and retire early. But after the stock bubble burst and Enron collapsed, the road to early retirement started to look a lot riskier. Yet our political leaders give no indication they have learned anything.

Republicans seem determined to ignore or paper over any real-world difficulties, even continuing to push plans to privatize Social Security. But Democrats have failed to use Enron as the platform for broad reform. "One Democrat said that we'd learned the lesson of Enron: If you don't invest wisely, you'll be hurt," says Jeff Faux, president of the Economic Policy Institute. "But the lesson of Enron is that even if you invest wisely, you'll be hurt."

After all, Enron was touted as one of America's greatest, forward-thinking corporations. When it fell apart, low-level Enron employees with most of their savings in Enron stock were hurt the worst and are likely to recover very little. But millions of others lost retirement savings from Enron stocks in mutual funds or pension plans. Even before Enron, according to the Employee Benefits Research Institute, 1.5 million Americans over 60 lost $10.5 billion in their tax-advantaged, employer sponsored 401(k) retirement accounts during the stock market drop in 2000.

Both parties are promoting legislation to deal with specific issues raised by Enron, such as the restrictions that kept lower level employees from selling their plummeting stock when the bosses had been quietly selling theirs at high prices and Iying about its prospects. Democratic proposals go beyond what Bush offers, but even most of those are modest. With most voters unable to distinguish the technical details, the Democrats may find it hard to score points politically, since they are already seen-quite rightly-as tainted by Enron political contributions, even if the Bush administration is much more intimately linked to the company.

The specific Enron abuses are important. "But Enron and [employees holding] company stock is one tiny problem in the retirement universe," says Karen Ferguson, director of the Pension Rights Center. "Our hope had been this would be the impetus for Congress to take a hard look at the private retirement system and begin closing a whole range of gaps. Instead, they're taking the narrowest focus to address highly specific concerns at Enron and then only partly addressing those concerns."

The fundamental problem is that most Americans don't have l secure, adequate provisions fat retirement. Social Security has been a great success, and, despite the fearmongering, the program is adequately funded through at least 2038 (and, with modest adjustments, can be made solvent through the rest of the century). Indeed, last year's tax cut for the rich will cost more than twice as much as the projected shortfall in Social Security over 75 years, according to the Center on Budget and Policy Priorities.

Republican privatization plans would only make matters worse. According to an analysis for the Century Foundation by several leading economists, privatization would lead to immediate and permanent cuts of about 40 percent in Social Security benefits, and a large net loss even after establishment of new individual private accounts. This is especially worrisome because Social Security is the largest source of income for people currently retired, accounting on average for 41 percent of their income in 2000 (and is the exclusive income for millions of retirees, survivors and the disabled).

Unlike in many European countries, where public pensions are intended to provide adequate income in their own right to everyone, Social Security has always been seen as a social insurance program to be supplemented by pensions and private savings. Yet in 2001, only 44.5 percent of workers participated in an employer-sponsored retirement plan of any type, roughly the same amount as two decades ago.

But the percentage of workers in traditional pension plans with defined, guaranteed benefits has dropped dramatically. At the same time, there has been a sharp growth in plans with a defined contribution to private investments, including company stock (which is sometimes partly matched by employers). In 1999, Americans had a little less than $2.5 trillion in assets in individual retirement accounts and nearly the same in defined contribution plans, with $2.2 trillion in traditional pension plans.

The federal government has mainly tried to encourage private savings with incentives for workers and employers that now cost $90 billion a year in tax expenditures. Overwhelmingly, these tax subsidies benefit middle- or upper income workers. Top executives often have both lavish defined benefit pensions and tax-advantaged stock options. But the General Accounting Office found that 85 percent of those who work but do not have any pension coverage have low incomes, work part time or for a small firm, or are young. Minorities have fewer retirement savings and draw less from Social Security. This is not because Social Security denies them opportunity, as the Bush Social Security Commission deceitfully suggested, but because they are paid poorly, can't save and, like poor whites, tend to die younger.

Yet post-Enron legislation under consideration in Congress I would deal with few of the fundamental problems. Democratic Sens. Jon Corzine of New Jersey and Barbara Boxer of Califomia initially proposed that no 401(k) plan could have more than 20 percent of any one company's stock. But even likely supporters such as unions, which already live with such limits in pension plans, didn't want to confront members who thought that they'd get rich from their own company's stock (and in many cases also had a secure, defined-benefit pension plan).

Now Massachusetts Sen. Ted Kennedy is proposing that employees may either buy their company's stock, or it may be offered as the employer match, but not both. Some analysts think this would reduce Enron-style overexposure, but Faux argues that Democrats should be standing up to popular illusions about "investment choice" and instead focus on the real goal of retirement plans: security.

Kennedy's proposed rules would require more disclosure by executives and make them liable for giving misleading information, as Enron CEO Ken Lay did. Workers would have the right to elect representatives to retirement plan boards and to vote company stock held in their accounts, as British workers already do successfully. Kennedy would also push for workers to get unbiased investment advice and have an advocacy office in the Labor Department. Initially he also proposed requiring that plans maintain sufficient insurance to protect workers (unlike Enron, where there is $85 million in insurance for $1.5 billion in employee losses), but the final legislation may only require a study of the feasibility of such insurance. While defined-benefit plans already are guaranteed by the Pension Benefit Guaranty Corporation, there are currently no provisions to protect victims of fraud or mismanagement in defined-contribution plans.

Yet every time Congress moves to improve protections for retirees, corporations threaten to drop their plans or their contributions. To remove that threat, enact serious reforms and simultaneously expand private pensions to all workers, Congress would have to make private pension plans universal and mandatory, as countries like Australia and Switzerland have done. In 1981, a Social Security Commission appointed by President Carter advocated a mandatory universal minimal pension system-MUMPS-but the idea went nowhere in the Reagan era.

Clinton and Gore proposed a voluntary add-on to Social Security that would have provided a graduated scale of tax credits (greatest for the lowest-income workers). While that would be an important departure from current tax breaks that favor more affluent savers, it would still not address the fundamental problem for low-wage workers: They are often paid so little that they barely make ends meet and have nothing to save.

Jane D'Arista, program director at the Financial Markets Center, an independent research and advocacy group, argues that Social Security should be supplemented with a plan that would mandate both employee and employer contributions to an investment plan that could be pooled, if businesses desired, to cover employers in a region or industry (much like the TIAA-CREF plan for higher-education employees). Tax subsidies would be designed to favor low-income workers, for whom such a plan would have the same effect as raising the minimum wage but instead redirect money toward retirement.

D'Arista also has long argued for changing the federal insurance on savings, which now covers only a small portion of individual savings and is often directed, as in the case of savings and loans, toward protecting the institution rather than the saver. She advocates a comprehensive insurance (paid for out of investment earnings) that would protect individual savings in 401(k)s, IRAs, bank accounts and other vehicles up to some maximum level, but not the institutions themselves. Vermont Rep. Bernie Sanders is exploring the possibility of introducing such a proposal.

Ultimately, fixing the retirement system requires an attack on many fronts to reduce the income inequality that has been growing for 30 years and especially to boost the earnings of workers at the bottom of the economic ladder. While protecting Social Security from the ravages of privatization and reforming the private retirement system, it is important to redress inequalities, not reinforce them as current tax subsidies do.

The campaigns to privatize Social Security and prevent regulation of private retirement plans are as full of false promises as Enron's accounts. Under the guise of promising greater wealth, these corporate crusades actually want to increase insecurity and discipline over workers as they extend the years of work. It is important to remember that the goal of retirement plans is to increase security and to make less work time and more leisure one of the rewards of economic growth. The debacle at Enron should have opened up that debate. Perhaps it still can.

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