By DeDe Audet
Articles in CityWatch (an online newsletter circulated among Neighborhood Council Coalition members) about pension planning engage my interest, but often reach above my ability to understand. It appears that the bankers and investment folks argue for full investment whereas a city union worker argues for less.
There is plenty of recent history to make all workers aware that their hard-earned retirement money may not be in the best hands as long as greedy politicians or corporate officers can run their institutions into bankruptcy.
I have no training in pension benefits. All those symbols like DB or DC, ERISA, MVL, PBGC, and SOX tire my old brain. But as the beneficiary of a pension plan I do have an opinion and it has to do with age, cheating, crystal balls, and baloney.
Growing close to 90 gives me, I believe, a perspective. I am sure that I have outlived the “average” age of death predicted when my husband first signed up.
The actuaries who design these plans only have records of the past from which to predict the future. People in the past did not live as long as folks today. And because there are many others vested like me, my longevity is a burden not planned for by the “experts.”
Yes, but, planners say: our computer programs now build models based on all of the available information; we know that people live longer today, so we extrapolate that information into our models.
Nevertheless, the question remains; how much longer will people live in the future? Accused by their critics of guessing they respond, “Yes, but it is an educated guess.”
Why an educated guess is better than an uneducated one escapes me.
Keep in mind that predicting is predicting whether one uses a crystal ball or a computer. The sad stories of the huge number of trusts, corporations, and other entities who got caught by the I.R.S. for fudging depreciation and tax credits are a testament to the fast talking swindlers who sold fancy computer programs designed to bilk the U.S. Treasury.
From the nineteen-eighties to 2008 the U.S. Treasury lost $30 to $300 billion per year in tax shelter schemes. For quite a while the schemers got away with it because the I.R.S. did not have enough investigators or lawyers to pursue the cases.
The statute of limitations on federal tax fraud requires the I.R.S. to file within three years. In 2002 the I.R.S. caught up with part of its backlog and nailed those who filed returns based on LILO (Lease In, Lease Out) tax shelters to evade U.S. tax.
In 2005 the I.R.S. finally caught up with entities using SILO (Sale In, Lease Out) tax shelter programs to evade their tax. In 2008 if the tax evaders just brought the money in right away they were offered a deal, “Send what you owe and the penalty is forgiven.”
Unfortunately, some could not pay up. Wachovia provides a splendid example. With $800 billion in assets, Wachovia could not pay $800 million in tax, 1/10th of 1 per cent! Many more of the tax evaders suffered the same.
So why didn’t all those fancy models predict this kind of fallout? Surely someone could have figured out that the I.R.S. would eventually catch up. The “tax specialists” who sold the tax shelter programs were not hiding.
Too, the use of computers by investors speeded up the buying and selling of assets at the same time as leverage increased. The idea of using leverage, other people’s money, became extremely popular.
So more people went on “margin” to make more transactions. As the value of assets grew, they believed they were lessening their exposure without, apparently, noticing that their risk increased.
Several years ago, a nephew went into the gold market on margin secured by his residence and business holdings. When we came to visit him on a Saturday after he began this adventure he was haggard and it looked like he hadn’t changed his clothes in days. The market was moving at a rate faster than he could research and he had to scramble to keep ahead of the interest he had to pay for the leverage. He felt he was lucky when he finally got a chance to back out without losing his shirt.
Of course, he was not an expert and might have expected trouble by playing with other people’s money. The ancients had a name for this. They called it usury and it was not a compliment.
For more than twenty years, up to February 2008, leverage worked as long as markets kept going up. All of the experts benefited by the gains. And the tax evaders had all that extra money to play with.
But everyone knows that markets also fall down. Sooner or later, the government will catch up with fancy cheating schemes. Why didn’t the experts plan for that? And how do you plan benefits for a populace that, year by year, increases its age while using a market that may be up one year and down the next? At what rate of increase or decrease? Well, nobody knows.
Here are a few things that payers into a retirement plan might want to consider carefully:
1) In 2009, every pension plan I know about admitted that net worth was down. Then followed that news with an announcement that it is no cause for alarm. But the reasoning is unclear. Had the pension planners intended to lose billions?
2) Computers make a game of playing with margins and not always to the benefit of the user. There will always be someone with a faster computer or who knows how to slow down results.
3) People are getting older at an unknown rate and no one knows if it will continue.
4) Experts can’t tell when a market will implode. Or if they can, they sure as hell are not telling the rest of us.
So, taking these things into consideration, wouldn’t it be wise to follow a course of making employers lay aside more for tomorrow rather than less? A union worker who argues for less perplexes me. In thinking about pension plans, I am not comfortable with the thought that those who retire after me might be cold or hungry without a place to lie down because some fortune teller, er, excuse me, expert was not as wise as advertised.