We know of a retirement program that has been very much in the news, in which investments were restricted to the securities issued by a single entity. Most participants appeared satisfied, until it was discovered that the accounting methods used to track the soundness of those securities, while apparently within recognized guidelines, completely obscured the fact that the entity was enormously in debt. While participants were blindly contributing to the plan, the principals with the responsibility for ensuring the solvency of the underlying investment were instead using the arrangement to pursue their personal agendas. Ultimately, the scheme collapsed, and the participants were left holding the bag.

No, we’re not talking about Enron; we’re talking about Social Security.

As our parent, AIER, has pointed out many times, the payroll tax receipts attributable to Social Security currently exceed disbursements, but the “trust fund” to which this excess is credited amounts to little more than an instrument of accounting chicanery. In fact, the proceeds are “invested” in the non-marketable securities (bonds) of a single entity (the U.S. Government). But why does the government borrow, if not to spend? Politicians devised this scheme to create the appearance of a sound retirement system, while in fact using the surplus to spend on everything from farm subsidies to space shuttles in order to enhance their chances for re-election.

In the wake of the Enron debacle, Senator Barbara Boxer (D California) and John Corzine (D New Jersey) have called for an amendment that would limit the amount of company stock permitted in participant-directed retirement plans to 20 percent. Politicians and pundits have expressed their incredulity that employers would restrict participants’ investment options to employer stock. We note that only the employer’s matching contribution was contractually restricted to holding Enron stock, and that the employees’ contributory accounts were frozen for only a very brief period. Enron’s employees had other investment options, but the media horror stories typically describe employees who held far more Enron stock than what was required by the plan. We have heard heart-rending stories of now worthless accounts that had once exceeded $1 million. But the stories fail to point out that had the 20% restriction applied, their accounts never would have approached $1 million to begin with. The notion that the “right” regulations would have preserved the millionaire status of countless Enron employees is nonsense.

But more importantly, even if company stock was in effect a mandatory form of compensation, no one forced anyone to work at Enron. We recognize that the fiasco involved a severe breach of fiduciary responsibility, that not all investors shared access to the same information, and that everything that could go wrong did go wrong. But this is what risk is all about, and ultimately the decision to hold Enron stock, and how much to hold, was in the hands of those who owned it. Did Enron employees learn nothing from the sudden evaporation of “dot com” millionaires?

Relative to the working population, which with very few exceptions must participate in the great Ponzi scheme known as Social Security, Enron employees enjoyed a retirement program that was downright liberal with regard to the opportunity for diversification. U.S. citizens must dedicate 12.4% of their earnings to Social Security, which has never been solvent in an actuarial sense. Social Security simply transfers earnings from one generation to another. It is not an investment plan with individual accounts. Moreover, changing demographics will not allow these sleight-of-hand transfers to continue unless the scheme is altered. We are compelled by law to put all of our Social Security eggs in an imaginary basket.

If the Senators were genuinely concerned with workers’ retirement plans, it seems to us they would also require that no more than 20% of Social Security payroll taxes be invested in government securities. The remaining 80% could be designated personal savings accounts allowing individual discretion among investment options. Don’t hold your breath.

Also in This Issue;

Quarterly Review of Investment Policy
Foreign Stocks
Newmont Mining: The Rich Get Richer
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield