Enron and Social Security Reform

Everyone with an axe to grind is using the example of Enron to grind free markets. And Paul Krugman is doing no less in a December 4, 2001, New York Times op-ed, “A Defining Issue.”

Krugman is using Enron to demonstrate the terrible dangers of “defined contribution” pension plans — like 401(k) plans. You see, some workers invest them in the stock of their employer, and Krugman worries that some of those might turn out to be like Enron. Although he generously admits that “One hopes that corporate collapses will not become commonplace,” nonetheless the risk must be stamped out at all costs, and must certainly not be replicated in the Social Security system by allowing individuals to control the investments of their Social Security accounts.

Why not? Because people might buy the securities of the plan’s sponsor, the United States Government, the way some Enron employees bought Enron stock? But that’s exactly what 100 cents on the dollar of Social Security investments are doing right now — buying Treasury bonds. That’s far worse than some Enron employees buying some Enron stock in their 401(k) that they control. That’s like Enron itself buying Enron bonds and using it to fund its own pension obligations in its “defined benefit” plan, where it’s on the hook to pay contractual benefits to workers.

Krugman wants to go back to the paternalistic world where defined benefit plans are the one and only way retirement savings get invested — where workers have no say in investments — and, by the way, where if the sponsoring employer goes belly-up the consequences can be far worse because no one is there to pay those “defined” benefits. Krugman lauds Social Security as a great defined benefit plan, and rips George W. Bush’s Commission to Strengthen Social Security for advocating that workers should have a choice.

Krugman calls Social Security “…the one great defined-benefit program that remains.” But he ignores the reality that the benefits of Social Security are not really defined at all — unless you mean “defined” by the whim of Congress, who possess unlimited power to alter, reduce, delay, tax, means-test, or even entirely eliminate benefits at any time if they chose to so “define” (and believe me, they have and they will).

Why won’t Krugman try using that massive Ivy League brain of his to propose a good idea that would actually help people in their lives, rather than just column after column endlessly finding fault — nastily, churlishly, contemptuously — with anything that wasn’t legislated by either Franklin Roosevelt or Bill Clinton. Surely they don’t have a monopoly on good ideas. What are his? Does he have any?


Don Luskin

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at www.poorandstupid.com. He is also a contributing writer to SmartMoney.com.