Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, October 31, 1993 TAG: 9310270259
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
Ely, a financial consultant in Alexandria, said the next crises will hit in the financial markets and affect pension plans.
While others have fretted recently about the solvency of banks and thrifts, Ely said those institutions are overly safe. So safe and so regulated, in fact, that they are losing market share to more high-flying and profitable investments.
"What regulators have done is to drive money out of banks and thrifts," Ely said in a recent interview. And right into danger.
He has long advocated banking law changes such as privatization of deposit insurance, saying Congress "has overreacted to the [savings and loan] problem." But in other financial matters "we are playing Russian roulette out there," Ely said.
If the economy becomes sufficiently unstable, he said, we can expect a crisis in the stock and bond markets and with mutual funds.
He envisions a liquidity problem if those markets lose their stability. "A lot of people will be heading for the door at the same time," Ely said.
Under this scenario, people will become afraid for some reason, selling their stocks, bonds and mutual fund shares in favor of cash. The funds must then sell off their portfolios in order to redeem the shares, causing even greater havoc in the markets.
What worries Ely about this potential crisis is the financial loss that the Federal Reserve Bank, the nation's central bank, might absorb in its attempt to balance the markets.
Many other people also have envisioned a similar crisis.
Ely's latest concern is what he called "the slow-moving cancer" attacking the viability of our pension system.
Many companies, he said, have been allowed to develop deficits in funding their employees' pension plans. This includes large and important companies like General Motors Corp. and major airlines.
They can underfund now, he pointed out, because there can be no run on pension plans the way a run can develop on the markets. The money comes due only as employees reach retirement age.
That makes the problem slow-moving. Ely said he believes it will take five to 10 years before enough people retire to reveal stress on pension programs.
"That doesn't mean it shouldn't be addressed today," Ely said. One way is for these companies to properly fund their pension systems. But he doesn't see know many of them will be able to do this.
The safer and more practical way, according to Ely, is to abandon traditional defined-benefit plans in favor of defined-contribution plans.
A defined-benefit plan specifies the amount of the pension that will be due each worker during his retirement. It is up to the employer to contribute enough money, then earn a sufficiently high return to fund the plan.
Defined-contribution plans, such as popular 401(k) programs, are open-ended. Employers and employees contribute specific amounts. The retirement benefit, therefore, is the amount of money saved plus the return it has earned through investments.
With defined-contribution plans, Ely explained, there is no unfunded liability as people retire.
Ely would abolish defined-benefit plans because the promised money may not be there when it's needed. "It's time to put these things out of business," he said.
Ely foresees some opposition to his proposal: "The unions will scream blue murder."
But he doesn't think that such opposition should allow the continuation of what he sees as bad public policy.
The amount of the pension deficit is increasing, he said, and companies that underfund their plans are, in effect, not only receiving subsidies from companies with healthy plans, but also from those people counting on the money for retirement.
He compared it to the tax on healthy banks and thrifts to subsidize those that got into trouble.
The pension problem, furthermore, parallels the Social Security problem. Both will hit, Ely said, just as the so-called baby boomers are thinking of retirement.
He sees trouble ahead, too, for railroad workers and mine workers because fewer and fewer people will be working in those industries to contribute to retirement plans that support a larger number of retirees.
Another quandary is that some people fail to take advantage of 401(k) and similar programs to save for their retirements.
Ely is working on the idea of requiring all workers to set up their own escrow account with mandated savings over a lifetime.
Employers and employees would have to contribute to the escrow account for retirement.
This account, Ely said, would replace both defined-benefit plans and Social Security.
Ely proposes such savings as mandatory, forcing people to save for their retirement years.
It would be portable. People could go from job to job without sacrificing pension benefits as they sometimes do now by switching employers.
Money would be there at retirement because nobody could touch the money before then, according to Ely's proposal.
In effect, he said, the account would be a lifelong annuity program.
This notion is not as revolutionary as it sounds. Ely said it is used in Chile, where the program works well.
Ely also said this idea should be handled in the context of Social Security reform and in health care provisions for the aged.
Does he think it will happen?
"We're not very good in this country in dealing with comprehensive issues," Ely said.
Mag Poff covers banking, personal finance, real estate and advertising for the Roanoke Times & World-News.
by CNB