Retirement Insecurity?

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We don’t have to look very far to find a prime example: Enron. Because many of its employees had a substantial portion of their 401(k)s invested in company stock, they lost much of their retirement savings when Enron filed for bankruptcy in December 2001. Some readers might argue that the effects of the bankruptcy would not have been nearly as devastating had these employees followed a primary rule of investment strategy: diversification. Although the magnitude of this corporate failure was of historical proportions, the speed with which it unfolded caught the regulatory and investing communities completely by surprise and made it impossible to mitigate the losses.

In addition, Enron’s management prohibited the company’s 401(k) program participants from making changes to their investment accounts for a period of time prior to the bankruptcy. Ironically, high-level officers were allowed to cash out during this blackout period, putting the rest of Enron’s employees at an extremely unfair disadvantage.

Government Pension Plans

A fact of life for government employees is that they are generally not paid as well as those in the private sector. On the other hand, the benefits available for civil servants far surpass those offered by for-profit businesses, at least for rank-and-file workers. While many companies are scaling back guaranteed pensions and healthcare benefits to cut costs, governments have been increasing monthly retirement payments, making it easier to retire at 55, and enhancing retirees’ health benefits. State and local governments have been adding benefits the fastest, and often cannot reduce existing benefits because of union contracts. This poses a serious financial challenge for future taxpayers because current funding is inadequate to cover the expected long-term costs of government employee pensions and other postemployment benefits.

Likewise, a “buy now, pay later” mentality has jeopardized the fiscal soundness of the U.S. Social Security system. When the bills come due, the federal government simply changes the accounting rules. President Lyndon Johnson took Social Security off-budget, and then raided it to reduce the federal budget deficit. This scam is still in operation, and as the ratio of Social Security contributors to beneficiaries declines, a primary source of income for the majority of elderly people, and the only source of income for some retirees, is further threatened.

Possible Solutions

The accounting profession can be instrumental in bringing some of the problems surrounding pensions and Social Security to the attention of regulators and legislators at every level of government. Here are some suggestions:

• Take pension funding and other related decisions out of the control of managers. The ability to underfund a defined-benefit pension plan currently rests with management. Underfunding may occur because of poor cash flow or the organization’s ability to earn a greater after-tax rate of return elsewhere.
• Require entities to recognize and adequately fund future pension and other postemployment liabilities. A review of a pension plan’s valuation should be performed periodically by an independent actuary. This would provide an impartial evaluation of the fairness of the methods and assumptions and the resulting actuarially computed contributions and liabilities.
• Include fraud-detection and -deterrence specialists for audits of public companies and organizations that receive public funding. CPAs will ultimately need to assume responsibility as “financial cops” to maintain their credibility and usefulness for protecting the public’s interest.
• Educate the public. Financial literacy must be given equal attention with the three “Rs”—reading, writing, and ’rithmetic—beginning in elementary school. This should include the basics of how to balance a checkbook, buy a home, and invest savings. Employees are expected to choose asset allocations for their retirement account, yet many of them are clueless about various types of investment vehicles and strategies.

Raising this issue with government leaders may not be part of an accountant’s traditional role, but it is an integral part of protecting the public’s interest. As always, I welcome your comments and suggestions on these and other issues.

Mary-Jo Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org

©2008 The New York State Society of CPAs. Legal Notices