A Defining Issue
The New York Times
December 4, 2001
RECKONINGS
By PAUL KRUGMAN
When a seemingly profitable
enterprise suddenly goes bankrupt,
there are surely lessons to be learned. When
that enterprise is the most admired company
in America, lauded by business theorists as
the quintessential 21st-century corporation,
one wonders if it is the tip of an iceberg.
And how many of us have, without knowing it, booked passage on the
Titanic?
It will take time, and many legal proceedings, before the full story of Enron's
collapse becomes known. But one thing is already clear: The case shows
how adept corporate executives have become at shifting risk away from
themselves and onto others, in particular onto their employees. Enron's
leaders have walked away from the debacle chastened but very, very rich.
Many of Enron's employees - no doubt including the loyalists who sent
irate letters every time I criticized the company - have lost their life savings.
Behind this disaster for ordinary workers lies a little-remarked sea change in
America's retirement system. Twenty years ago most workers were in
"defined benefit" plans - that is, their employers promised them a fixed
pension. Today most workers have "defined contribution" plans: they invest
money for their retirement, and accept the risk that those investments might
go bad. Retirement contributions are normally subsidized by the employer,
and receive special tax treatment; but all this is to no avail if, as happened at
Enron, the assets workers have bought lose most of their value.
It's easy to make the theoretical case for defined-contribution plans. Such
plans expand an employee's choices; he can choose how much to save, and
how to invest his money. And more choice is ordinarily good.
But the sad fate of Enron's employees highlights the difference between
theory and practice. As Gretchen Morgenson of The Times pointed out on
Sunday, workers across the country have been cajoled or coerced into
holding a high proportion of their retirement assets in their employers' own
stock. The exploitive nature of this financial incest was emphasized by
Enron's now-notorious "lockdown," in which - purely by coincidence, say
executives - new rules forced employees to remain invested in the
company's stock just as the firm began its death spiral. So much for freedom
of choice.
And even when employees have real choices, one wonders whether they
fully appreciate the risks. The shift away from old-fashioned pensions
coincided with an enormous bull market; surely many workers who have
never seen stock prices fall since they became investors underestimate the
risk of capital losses.
One hopes that corporate collapses will not become commonplace. Still, it's
highly likely that millions of American workers will have near- Enron
experiences, learning to their dismay that big chunks of their retirement
savings have evaporated. They will be left dependent on the one great
defined-benefit program that remains: Social Security. That is, if it's still
around.
The Bush administration's commission on Social Security reform issued its
latest report last week, just as Enron entered its death throes. Most of the
criticism of that commission's work, my own included, has focused on its,
yes, Enron-like accounting: items seem to migrate onto or off the balance
sheet to suit the commission's convenience. Thus when the Social Security
system takes in more money than it pays out, as it does at present, this has
no significance - the federal budget is unified, you see, so it doesn't mean
anything when one particular piece of it is in surplus. But in 2016, when the
Social Security system starts to pay out more than it takes in, there will be a
crisis - Social Security, you see, must stand on its own.
But the commission resorts to bogus accounting only to make the case for its
ultimate objective: to convert Social Security from a defined-benefit system,
which guarantees retired Americans a certain basic income, to a
defined-contribution system, in which the unwise or unlucky can find
themselves destitute in their old age.
Some analysts I know think Social Security will be converted to a
defined-contribution system, not because it is a good idea but because the
financial industry - which has enormous clout in our money-driven political
system - has so much to gain from the conversion. I hope they're wrong.
But if they are right, the fate of Enron's poor employees, victimized by a
management team they thought was on their side, may truly be the shape of
things to come.
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