Enron not 'a cautionary tale'
1/24/2002 12:00:00 AM - Joel Mowbray
Many on the left are now proclaiming with giddy delight that the Enron
meltdown signals the demise of Social Security privatization.
Though the whole situation is certainly tragic for Enron employees and
ordinary shareholders, it is in no way a cautionary tale about plans to
reform Social Security with personal accounts. Anyone who attempts to
show that a future large-scale bankruptcy would force Social Security
personal accounts to go bust is flagrantly misinterpreting every serious
plan currently under consideration.
The basic reform framework adopted by most privatizers and Bush's
Commission to Strengthen Social Security (CSSS) calls for 2% of income,
or roughly 1/5 of FICA taxes devoted to retirement benefits, to be
diverted into privately-held accounts. Although individual workers
would own the accounts, investment options would be tightly regulated.
People would only be allowed to select broad-based mutual funds,
holding stock in hundreds or thousands of corporations. The downfall of
any one entity, even one as large as Enron, would not wipe out a large
portion of the funds, let alone sink the whole ship.
When it comes to partial privatization of Social Security, however,
opponents of reform would never let something like facts get in their
way. Using Enron as a scare tactic is merely a revamped version of Al
Gore's 2000 campaign rhetoric, attacking Bush's 2% proposal as a "risky
scheme." But preying on voters' perceived insecurities about the stock
market will not work when confronted with historical evidence.
Over the past 75 years, a period that includes not just the failure of
many corporate giants, but the Great Depression, several recessions, and
the stock market correction of 1987, the Standard and Poors 500 Index
has an annual rate of return of 7.75% after inflation. In fact, there
is no 40-year period during which the real rate of return has been less
than 7%, according to the Cato Institute.
Critics contend that far more could go wrong than a single company
collapsing, such as a market crash, like 1929 or 1987. But even if such
a nightmare scenario were to happen, crashes do not wipe out the
entirety of wealth accumulated over decades. Besides, the market has
always bounced back, allowing investors to recoup those losses in a
relatively short period of time. Even after the 1987 stock market
crash, the worst single-day percentage drop since 1929, stocks regained
all the lost value before the end of the year.
The reason the Enron situation is so tragic is that the execs
snookered loyal workers into holding onto company stock, while at the
same time they were dumping their own stock. Depending on the fruits of
pending investigations, top Enron officials' actions might be not just
treacherous, but criminal as well.
If anything, the decimation of Enron's stock price will provide a
valuable lesson in diversification. Although they were no doubt spurred
on by executives' outright lies, Enron employees who lost everything
only suffered that fate because they put all their eggs in one basket.
Even honest executives, which is much more the rule than the exception,
can be horribly wrong when predicting a bright financial future, so
intentional deception aside, no investor should ever tie up their
fortunes with a small number of companies.
But even the discussion on diversification is moot in the context of a
Social Security privatization debate, because all major blueprints,
including those released by CSSS, would mandate certain minimum
standards for asset allocation to minimize risk. Nobody would be
allowed to day-trade his or her retirement funds, and there would be
professional money managers offering a menu of options, ranging from
safe government bonds to stock-bond mixtures to somewhat riskier
stock-only mutual funds.
People nearing retirement could further safeguard their Social
Security accounts from a stock market downturn by placing a greater
portion of their savings into low-risk Treasury bills and money
The real tragedy in the devastation suffered by Enron employees who,
in some cases, lost millions of dollars, is that shameless opponents of
Social Security reform are seeking to exploit their pain. Their brazen
attempts to score political points from others' misfortune are morally
wrong, and in light of the facts, just plain wrong.