The real outrage: pensions, not petrol

Another great piece in the subject of wealth and pensions by William Fleckenstein and a good follow up to the prior one by Bob Kiyosaki.
If you have not read Robert Kiyosaki books, I will suggest you read every single one, they are very helpful and they illustrate the need for awareness on the value of accumulating wealth.

My personal interest on pensions has to do with my believe and personal views about the value of community and the social structure of a community as support system for evolution.
I am seriously concerned about what I see in people's attitudes in non-challange way to neglect the weakest. This is accomplished by the use of fallacies and religion as tool to supress teh inmorality of their actions with weekly cleanings of their wrong doings. The justification are insane, in fact it is totally contradictory to what the preach, this arrogant stance has consequences. We all deserve the punishement for this outirght darwinian behavior. We are allowing to continue to thrive rapantly and unchecked.
It will not take much imagination to see all the present corruption that surround us from government elected officials to thier cronies in a rush to pilfer anything at the reach of their hands.
All this greed running amok is not sustainble. The present situation is arrogant and outright acceptable about stealing from any vulnerable person or institution.

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The real outrage: pensions, not petrol

Forget all the hoopla about oil price gouging; markets set oil prices. For real cases of rich execs cheating real people, study what they're doing to corporate pension plans.

By Bill Fleckenstein

Outrage is an emotion that's always intense -- but not always justified. This week's column will take a look at both kinds, as it swings from the oil patch to the pension-accounting arena. First off, a rant on the lunacy surrounding the fact that oil companies are making money.

The weather vanes in the Senate have held hearings about oil-company price manipulation. There has also been plenty of incoherent chatter about price gouging, much of it coming from TV talking heads who ought to know better.

To begin with, the price of oil is set in the marketplace. The Russians, Canadians, Mexicans and OPEC generically have a hell of a lot more to say about the price of oil than do our domestic oil companies.Start investing with $100.
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The price of oil is up thanks to money-printing by the Fed and every other central bank, which has triggered the global boom that everyone seems to love. People drive Hummers and other urban-assault vehicles, yet they expect the oil companies not to make money, as though they were charitable institutions?

'Home'-free from scrutiny?
Amidst the talk of taxing the oil companies on windfall profits, why isn't there a windfall-profits tax on the home builders? Why aren't there any hearings about price gouging in real estate? How come nobody complains about the price of bottled water being as expensive as it is? Because they don't see water companies making a whole bunch of money?

And how come the public never complained about Microsoft's (MSFT, news, msgs) price-gouging practices, as it had monopoly status in operating systems? Or when Intel (INTC, news, msgs) was the only game in town and able to charge whatever it felt like charging? Microsoft (publisher of this Web site) and Intel are the reason why PC prices aren't 50% lower than they are. The public didn't complain about that. Why? Because they were giddy about making money speculating in their shares.

Greed and broken promises
If the Senate and TV commentators want to be outraged, why not look into the real abuses occurring in the somewhat obscure pension-accounting arena? It essentially impacts only a few dozen large corporations, but it affects hundreds of thousands of lives.

What prompts this discussion: three well-written articles in last week's New York Times and Wall Street Journal that point out:


The potential problems for the folks counting on the past promises of these corporations.

How the corporate chieftains running them can jigger their pension assumptions to make their companies' earnings look good.
Of course, the two groups don't have their interests aligned. Those running the show have an entirely different agenda -- to boost the stock they hold options on, and probably their bonuses -- even if it puts all these hundreds of thousands of people at risk. It's a classic case of greed and broken promises.

The inflate-the-rate elixir
Probably the best primer on how the "math" works was "Pension Inquiry Shines Spotlight on Assumptions," an article in the Nov. 9 Wall Street Journal. It led off with General Motors (GM, news, msgs) because the SEC is now looking into the assumptions used in its pension accounting.

The article pointed out that there are two ways to make your results look better. One is to pick a high "assumed rate," which is the rate of return you expect your pension assets will yield. (Until 2002, GM had assumed 10% and has recently taken it down to 9%.) The second way is to manipulate the discount rate used to put a value on your future liabilities. The higher the rate you use, the lower the present value of that future liability looks and the more stable you appear.

The discount rate GM uses is 5.75%, down from 7.8% in 1999. A 25-basis-point (0.25 percentage point) change in the discount rate would impact its pension liabilities by $160 million. Similarly, a 25-basis-point change in the expected rate of return would affect GM's obligations by $220 million.

An example of how that was used to the benefit of corporations -- and to the detriment of workers -- was noted in "Pension Accounting Rule, Sometimes Murky, Is Under Pressure," a Nov. 8 New York Times article: "In 2004, for instance, Lucent Technologies (LU, news, msgs) said it earned $1.2 billion from operations. But $1.1 billion of that actually resulted from pension calculations." As you can see, moving these numbers around can change your results quite dramatically.

No-can-do candor
The New York Times article passed along another nugget to show the size of the potential discrepancy: "Last summer, the Securities and Exchange Commission said that it had studied a sample group of companies and found that they had told their shareholders they had an aggregate surplus of $91 billion in their pension funds, when a more honest accounting would have shown an aggregate deficit of $86 billion." (The emphasis is mine.)

Now, I don't know exactly what the words "more honest" mean. Nor do I know how real-world those calculations might be, as the numbers could be better or worse. If I had to guess, they would be worse, but, in any case, the size of the discrepancy is already quite large.

IBM (IBM, news, msgs) was a serial abuser of those same variables. The Times story noted that the company's reported earnings for 1999 to 2003 would have been reduced from $36 billion to $21 billion, "once the pension effect was removed." The article also pointed out that by putting more money in riskier assets, the plan sponsors can thereby justify higher assumed rates of return, thereby making the current levels of funding look better, thereby raising earnings and helping the bosses' narrow self-interests.

In the end, these strategies almost certainly place all the people in the plan at greater risk. But by then, the executives will be long gone -- and living large on the money they "earned" while pulling these levers.

Pension cop tails GM
When the chickens come home to roost, companies wind up (if things get bad enough) at the door of the Pension Benefit Guaranty Corp. According to another article in the Nov. 9 Wall Street Journal, titled "Pension Agency Casts Shadow on GM Sale," the PBGC, which partly guarantees defined-benefit pension plans, is concerned that the automaker's plans are underfunded to the tune of $31 billion, as opposed to being fully funded, as GM asserts.

The PBGC calculations don't even vary any of the overly optimistic assumptions I've already discussed. The agency arrives at its determination by assuming that GM's plans are terminated today instead of on some future date.

Grubby paws vs. pensioners' cause
The actions by the PBGC may cause headaches for Kirk Kerkorian, the investor who's been assembling a large stake in GM. As the Journal article noted: While GM is hoping to raise $11 billion to $15 billion by peeling off a stake in its consumer-finance arm, the agency may force the company to put some of the proceeds into the pension plan. That's probably something Kerkorian and other GM bulls hadn't counted on, as the stock is now lower than it was before he first showed up back in May.

To repeat, these problems only pertain to certain companies. But they do turn out to matter to plenty of people. This example of greed and broken promises is the type of behavior that gives capitalism a black eye.

Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site

Why the Rich Get Richer

I found this article by Roberth Kiyosaki to be a good copilation of knowledge on retirement. Each person should add some present knowledge of the situation of many presetn retirees, with that at hand, most people should have clear picture of what to expect in their late days on life.


Why the Rich Get Richer
by Robert Kiyosaki

So Long Pensions, Hello Fees
by Robert KiyosakiUtility Links

Tuesday, November 15, 2005

From 1945 to 1974, the Western World -- including America - was more socialistic than capitalistic, more pro-labor than pro-business. While that may sound surprising, when taken in context it makes perfect sense.

World War II had just been won and the Great Depression was still fresh in most Americans' minds. Having lived through these challenging times, Americans wanted a more benevolent, worker-friendly government. And they weren't alone. In England, Winston Churchill lost the 1945 election -- even though he was a war hero -- primarily because the English people wanted a pro-labor government, not a pro-capitalist government. Back in the U.S., President Franklin Delano Roosevelt's pro-worker policies were already in place, including the New Deal and Social Security.


This trend began to shift in 1974 with the passage of the Employee Retirement Income Security Act (ERISA). Under ERISA, companies were allowed to switch from defined benefit plans to defined contribution plans. Simply put, the primary responsibility -- as well as the expense and long-term consequences of retirement -- passed from the employer to the employee. As a result, pension plans gave way to self-managed plans like the 401(k) and Roth IRA.


Retirement Investor, Meet Wall Street


One might think that employers were the biggest beneficiaries of the changes ERISA put in motion over three decades ago, but I'd argue that biggest beneficiary was actually Wall Street.


Let me explain.


When I buy a piece of real estate, I may pay a 6 percent commission once. Even though I make money every month for years from my investment, I still only pay my real estate broker once. If I sell, I may or may not have to pay a commission. The choice is mine.


Yet when I invest in mutual funds (the vehicle of choice for most retirement plans), I very often pay a commission, or "management fee," every month -- even if I lose money.


Now I'm not against paying fees or commissions -- as long as I'm making money. But I do have a problem paying commissions or fees every month for bad advice. And most mutual fund advice has been bad, especially since March of 2000.


The Feeling Isn't Mutual


In his book "Unconventional Success," Yale University Chief Investment Officer David Swensen writes, "Sales charges from buying funds and tax burdens from churning funds combine to reduce already poor investor returns. Owners of actively managed mutual funds almost invariably lose." He goes on to say, "Other factors -- unethical kickbacks and indefensible distribution practices -- remain generally hidden from view."


Swensen also quotes a 20-year study which examined mutual fund returns over two decades ending in 1998. The study shows that over two decades mutual funds had miserable returns, an average shortfall of -2.1 percent when compared to the Vanguard 500 Index. And, the study ended in 1998 near the highs of the market!


In other words, most mutual fund managers cannot beat a mechanical method of investing, such as an index fund. But that doesn't stop them from regularly collecting "management fees."


In fact, says Swensen, the fees themselves are one reason many mutual fund managers don't manage to beat index funds. "A significant portion of the ... underperformance arises from the payment of management fees," he writes.


So if you're thinking about parking your retirement money in a mutual fund, be sure to ask about commissions and management fees. Or, even better, consider an index fund.

Proverbs and Sayings Save Energy

One of the healthiest ways to live a healing life is in parallel with a series of well known advice from our ancestors. Via proverbs sage people have ruled in wise ways. Present economic implications have direct link to energy savings and those proverbs. A little change in our daily modus operandi following the sage advice of the past might prove to be an enriching experience.
A few classic old proverbs to prove my point:

“Rise with the sun and rest with the sun and your wealth will abound.” I will add here the obvious if there is no much need for electricity you will save a few bucks every day. Natural light will also provide the much need it vitamins for a good looking and healthy skin.

“Read to your soul to gain in your brain.” Well, and easy one here no more TV for a while, and pick one of the many greatest authors from your local library and enjoy the ride.

“Dress me slowly that I am in a rush, I need to walk far away.” This one came to me from my great-grandmother. In the process I learned physics and it proved her right. Walks farther and slower you will save in gasoline and keep better cholesterol levels. Clearly, we all need to walk farther and often, and we do not do so, if as a community decide that all we need must be in walking distance, we can revive our local economies, supporting local businesses and healthier lives. A very simple equation, it supports a better tomorrow.

If you find proverbs and sayings to be entertaining, find a book at your local library and enjoy!