June 01, 2008

Stupid Person of the Week : Tara Setmayer

I woke up early on Sunday (well, for me anyway) and, while flipping through the guide, saw KLRU had on a program called To The Contrary.

Truly, it's an insipid little show with shallow analysis from people who clearly don't really understand the subject matter. Take 'Conservative Commentator' Tara Setmayer. No, really TAKE HER. What? You don't want her? Damn. I guess we'll just have to spend some time pointing out where baby got something wrong.

When asked a question about flextime, Tara attempted to answer the question... by discussing how airlines almost went out of business due to 'high retirement costs'. Bonnie Eber, the ridiculous host on loan from usnews.com, mentioned that 'while it may have been the case years ago, oil is really driving the margin squeeze now'. Tara agreed in general with that but pointed out they were 'just recovering from the pension issues and then oil prices hit them'.

How many times do you think we're going to have to do this? When the Republicans, as part of Kemp-Roth in 1981 if I remember correctly, allowed companies to change their pension calculations to basically anticipate a higher rate of return, it set events in motion that were destined to create problems for retirees. At the time, the rate was set low for expected returns, far lower in fact than the US 30 Year Treasury. So they changed things to allow companies to anticipate a return based ON the 30 Year Treasury. Which meant their current liabilities were actually much lower.

Basically, let's say I agree to pay you $100 per year from age 65 until you die (you're 35 now). Actuaries would tell me I need to start putting away money so that I can pay you from the income on that money, plus the principle. Ideally, it would be great if you'd die before 65, but since you probably won't, the actuaries will tell me that I need to put away around $17 per year now in order to give you the $100 per year until you die (which the actuaries tell me should be around 85) assuming I get a return of 5% on my money. Yes, I COULD get away with around $12 per year, but there are no guarantees that you'll die right at 85. So, I'll consider my over contribution 'insurance'.

I'll also hope like hell you die before 85 since if you do I get to pocket the remaining money after a pittance payout to your survivors.

Now, I'm 'overcontributing' to the plan because I'm cautious and smart. For years, this was how pensions worked in the US with rational people making rational decisions. Then came the Reagan Revolution which thoroughly screwed up pensions.

Now, back to where everything went off the rails... In the early 80's, companies were struggling to put enough into their pensions because of the anticipated payouts to WW2 era retirees (which was essentially an actuarial time bomb) and the fact that their investments had not grown much. So they went to Congress and there was singular moron Jack Kemp, ready and willing to cut them a break. His solution? They could dramatically increase their expected rate of return. Which means that to cover the liabilities they didn't need to invest as much money up front. This meant they could realize more profit and, because of performance related compensation plans, more money would be paid to top management.

It's not that management did a good job. The companies didn't really make any more money. They just changed their accounting and suddenly their profits went up (and so did pay to ineffective management teams ). Fast forward to 2001 when pensions were seriously starting to get burdened with retirees (SOME boomers and the WW2 generation that simply wasn't dying fast enough) and then, the stock market crashes (not to mention the next time bomb, the retirement of the boomers). If they'd put away what they were supposed to, it wouldn't be a problem. Now they have a massive pension short fall. The culprit is, of course, not bad management and those who came before that management, it's all those greedy retirees. The same folks who allowed you take money out of their paycheck for their pensions every single month. What to do?

Well, if you're an airline, you declare bankruptcy. And you also pay your management bonuses of more than $100 mn. The best part, which Capitalista Setmayer failed to mention? The bankruptcy wiped out all those pesky shareholders!

There were four other women on this program. NONE OF THEM EVEN BOTHERED TO SET HER STRAIGHT.

I now have a better understanding of why Democrats can't get ahead on the pure economic debate. They aren't smart enough to contradict the retarded things the Republicans say.

What's wrong with you people?

Posted by mcblogger at June 1, 2008 03:24 PM

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