Saturday, September 10, 2011

Rick, Charles, and Sam

Rick, Charles, and Sam

Let’s start with a dream.  You are a young married couple, both of you recent college graduates, both just starting your first jobs.  The world is one of limitless possibilities, and the two of you stay up at night talking about your hopes and plans. You have goals.  They are attainable with hard work and prudence, but by no means assured.  But you are willing to work at them and sacrifice to get there.  The two of you dream of two kids, a modest house, and, in retirement, a little cottage by the lake where you first fell in love.  He is going to write, and you are going to paint.

So, prudent people that you are, you plan.  You look at your combined incomes and decide, right now, you can take six percent of your pay and invest it for retirement.  You research carefully, and decide on an annuity that will pay out for your lifetimes, beginning at 65.  After more research, you go with the Equitable Providential Insurance Company of Elkhart, Indiana, a solid, conservative institution in business over 150 years, well managed, and Triple A rated.  The two of you agree that if you are fortunate to be able to save more, it will go towards other investments, but the 6% is going in, come hell or high water.

That’s what you do.  Sometimes it’s hard, when the house needs to be painted, or the dentist says “mmmm” when he checks your teeth.  Sometimes you have to disappoint the kids on vacations or sports.  There’s a really expensive pair of running shoes for you and a new set of golf clubs for him that you pass up.  Every month, like clockwork, you write the check to EPI, and every year they give you a statement of your expected benefit.

Forty years pass, and EPI is taken over by a private equity firm.  It loads the company up with debt, pays itself a big consulting fee for arranging the deal, then a large special dividend.  It installs a new board of directors and quadruples salaries and bonuses for top management.
A year later, both of you turn 65, you fill out the forms and turn them in, and wait for your first checks. 

It doesn’t arrive.  You call the company and are told that there is new management.  They have been reviewing all the annuity contracts, and feel it is not prudent to pay on them in light of the fact that they want to raise dividends for stockholders.  They have recruited a new CEO, and there are relocation expenses, a big exit package for the outgoing one, and retention bonuses for existing management.  They have better uses for the money that paying annuity-holders.

Of course, you wouldn’t stand for that.  No one would.  You would hire lawyers and sue them on the contracts-because they are contracts.  And, if justice prevailed (it often doesn’t, but we are living a dream), the judge would order the private equity firm to return the fees and the special dividends, and the bloated management to return its fat pay packages.  And maybe you could have your retirement and your cottage by the lake, which for 40 years you saved and did without for.

Just for a moment, close your eyes, and pretend that EPI is the United States Government, and that annuity contract you purchased was instead Social Security, and the premiums weren’t optional, but dedicated taxes that came out of paychecks in good times and bad.  The government took the money.

Now, we elect a new management, and our new CEO, supported by his newly elected Board of Directors, pronounces the entire program a “Ponzi Scheme” and “A Monstrous Lie”.  He doesn’t like the contract-he’d prefer to redirect the money to his favorite causes (which do not include paying out promised benefits).  He recognizes neither a moral or contractual obligation.  The program was bad to start with (75 years ago), he’s philosophically opposed to it, and so, poof, it’s history. 

Why should any of us, whether we are on Social Security right now, or have paid into it, accept “we won’t pay” from our elected officials-just because they don't like the program, or say they want to reduce other taxes?  This isn't just reducing or eliminating a government program-it's walking away from a contract where one side had already been paid.  If you believe in the sanctity of contracts (and there are few business, if any, who would not litigate to enforce one), you must acknowledge the legal obligation to pay the promised benefit.

Surely, any insurance company can decide not to sell a particular product any more.  And, by extension, our government may need to look hard at the program (as well as Medicare) that it has been collecting taxes on for many decades.   We, as a people, may feel it’s prudent to make more modest promises to future generations.  And surely, we can discuss how best to manage the promises we made with existing resources.  But this isn’t just a private equity firm milking an old, well-capitalized insurance company and leaving it a shell.  Our government represents every single one of us, and it must deal with each one of us with honor and integrity.  To just abrogate the obligations that our citizens have paid for is more than unconscionable, it is pure and simple theft, and state sanctioned theft at that.  Charles Ponzi might have approved.