The Future Has Already Been Sold: Private Sector Version

Some time I ago, I reported having read in the Wall Street Journal that the rich pensions top executives had bestowed on each other were contributing nearly as much to the destruction of American business as the rich pensions grabbed by the unionized rank and file. A commenter asked for a reference, but I didn’t have one at the time. Today, it its lead story (summary — full article subscribers only), the Journal repeats the assertion. “Financial giants getting injections of federal cash owed their executives more than $40 billion for past years' pay and pensions as of the end of 2007, a Wall Street Journal analysis shows.” The analysis is an estimate because the future obligations to executives are hidden, disguised, and underestimated in company accounts. At some firms, according to the Journal, the pensions and other deferred compensation for executives “exceed what they owe in pensions to their entire workforce,” and the practice of awarding hidden rich pensions and other deferred compensation, and paying little up front for it, “is common in big business.” A familiar story for those who have read my posts on public sector pensions. Since the costs are shifted to the future, they are described as minimal, and those in power take the absolutely guaranteed money up front. The consequences come later.

The $40 billion figure includes both pensions and other forms of deferred compensation, but huge executive pensions have become the norm in the past decade. It isn’t often in this “robber baron” era that the executive caste overlords have played Mussolini to the political class Hitler, but they are clearly following the trend here, after noticing that pensions — no matter how unfair and excessive — are inviolate. The executives noticed the tax benefits, and that corrupt public employees got to keep their pensions following their convictions while corrupt executives often lost their financial wealth.

Public employee pensions, no matter how high or whether granted at hire or sweetened retroactively, “must be paid” no matter how high the tax burden becomes to pay for them, even if public services would collapse. They are guaranteed by state constitutions, federal labor law, and contract law, even though nothing is provided in return for retroactive pension enhancements, other than political support for incumbent politicians. The New York State legislature could vote tomorrow to allow every New York state and local employee, including themselves, to retire immediately with a pension that was double their salary. And the public would be obligated to pay, even if state and local taxes would double and schools, transit systems, police protection, garbage pick up — all public services — would cease to exist. They move closer to this scenario in every legislative session.

Still want to buy stock? According to the Journal in corporate America “these liabilities are an essentially hidden obligation,” but one that must be paid before the first dollar is distributed to shareholders. In addition to the inviolate pensions and supplementary pensions, there are deferred accounts in which the company guarantees a minimum rate of return while the executive takes any upside. The executives, the Journal reports, “assign an interest rate at which the hypothetical account grows. Often, it is a very generous rate. At Freddie Mac, executives earned 9.25% on their deferred pay accounts in 2007.” And I though the assumption of an 8.0% return from the peak of the stock bubble in 2000, which is what many public pension plans assumed in order to justify retroactive pension enhancements that public employees neither worked for nor had a right to expect when they were hired, was outrageous. (In many places, public employees have also been granted deferred income in the form of accounts with high guaranteed rates of return, one factor in the destruction of the City of San Diego and the Chicago Transit Authority). How many years of future corporate profits have already been captured by the executive caste, many of whom are no longer working? And what, given that, are American businesses really worth? No wonder the dividend yield has been in the 2.0% range for years, and dividends are going down. Are the shills saying “stocks are cheap” aware of this?

“Since all this money is tax-deferred, the Treasury, and by extension the taxpayer, subsidizes the accounts.” The maximum us serfs can contribute to a 401K on a tax-deferred basis is about $15,000, but that maximum apparently does not apply to powerful self-dealers. And 401Ks are the best most Americans now get, given the replacement of “defined benefit” plans with “defined contribution” plans for my generation and those after. A generation later, what is the level of “defined contribution?” At my company it is just 1.0%; more typically it has gradually been cut zero. Then again, a majority of Americans don’t get any retirement benefits, just Social Security, which also has a lower claim on the nation’s future income that executive and public employee pensions. And when these executives, like public employees, receive all that retirement income, it is exempted from New York State and New York City income taxes, no matter how high it is, leading to the kind of inequities I described here. Not taxed on the way in, (aside from, I’m told, the employee contributions –virtually none in New York, especially compared with the taxpayer), it is untaxed on the way out.

Now that companies have gone bankrupt and are on the federal dole, any chance those pensions won’t be paid” “At Freddie Mac most will,” according to the Journal. “Deferred compensation belongs to the officers who earned it.” Interesting use of the word “earn” given what has happened to so many companies, their employees and (in the case of investment firms) customers. Yes, like those in New York’s public employee unions and the legislature, the executive caste believes it is entitled, deserving of everything they have promised themselves, with the difference between their take and that of the vast majority of Americans considered irrelevant.

Consider this article on Bloomberg News. “Wall Street's chief executives will hunker down and pay bonuses this year in the face of the worst financial crisis since the Great Depression, a taxpayer bailout and mounting political outcry, industry veterans say.” The base pay, which ranges from $80,000 to $600,000, isn’t enough. “More than one-third of Wall Street employees surveyed by a recruitment Web site between Oct. 13 and Oct. 21 said they expect a bigger bonus this year. Two-thirds of the 1,300 people surveyed said they still expect some year-end award, according to, owned by New York-based Dice Holdings Inc.” Well, the fact that NYC residents are paying higher taxes than in 2000 while going deeper into debt and not investing enough on infrastructure, due to drastically higher pension payments, hasn’t stopped public employee pension enhancements from being added has it? Hundreds are introduced and dozens pass every year, with the shift in teacher retirement from age 62 to age 55 — described as costing nothing just a few months ago — likely to be the most devastating of all.

And what if the political pressure gets too great? Perhaps they will agree to drastically lower pay and benefits for future financial executives, who will then be encouraged to do a worse job for less pay, once again following the public sector practice. In state and local government, I’m just waiting for the “screw the newbie” portion of the “screw the newbie, flee to Florida” cycle to rear its head, especially given that the New York State legislature has just made the requirement that all those newbies be forced to pay union dues permanent. Coincidence?

For those of us who know what is going on, the public sector predators are far more offensive, and far more damaging. I can keep money out of the stock market until I am certain that the predatory executive drain is diminished, (though if state and local public employee pension funds invest in stocks I will be forced to sacrifice for every dollar stocks lose). I can place that money through a mutual investment company rather than the den of thieves. I can spend money on what I need, rather than what advertisers tell me I have to have to avoid being a social misfit, and demand a fair deal. But the federal, state and local governments will seize my money whether I like it or not, and redistribute it, not to those worse off than I am, but to those with a greater sense of entitlement. All while I and my family are inevitably affected by the deterioration of public services we have paid for many times over.

Governor Paterson has called for shared sacrifice. Is there any chance at all that those with power and unearned privileges will be told to sacrifice first, or at all? None. In fact, while allowing them to gain more and more unearned privileges, the Governor and state legislature would not and will not even tell them that they have in fact received unearned privileges. Enabling rationalization, indeed enabling them to delude themselves into thinking everyone else is ripping them off, is part of their deal.   After all, other than the executive caste and the political caste, who provides the campaign contribution and ballot access litigation support that keep incumbent legislatures in office — and make elections meaningless — no matter what they do to us?