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    Highlights—January 15, 2005
  • Janet Krueger: Final order for subclass 3 of Cooper v IBM. Full excerpt: The fairness hearing for subclass 3 of Cooper v IBM was held on Jan 10. As a result, Judge Murphy issued a final order for distribution of the $20 million settlement. The order is posted on the files section of this board as: Cooper ord-011005 final order as to subclass 3.PDF The legal teams are still working on the settlement formula and notice for subclasses 1 and 2 -- at this point, I don't expect to see the settlement notice until at least the end of February 2005, with the fairness hearing scheduled in late spring or early summer.
  • Janet Krueger: I just uploaded a spreadsheet [Microsoft Excel] to the files area of this board which has been updated with the IBM statistics IBM filed on their form 5500 for the US pension fund filed in October 2004. Any comments from all you analysts? (Editor's note: Data from the January 2003 form 5500 are duplicated in the table below. Ms. Krueger's spreadsheet also shows data for five years).
      Years of Service
    Attained Age < 1 1-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 > 40 Totals
    Under 25 576 2,607 36               3,219
    25 to 29 2,070 8,926 1,863 2             12,861
    30 to 34 2,732 8,254 4,255 611 22           15,874
    35 to 39 2,316 6,860 3,981 3,249 2,079 69         18,554
    40 to 44 1,876 6,428 3,582 2,037 6,366 6,059 206       26,554
    45 to 49 1,337 4,623 2,809 1,162 3,103 8,697 4,027 61     25,819
    50 to 54 884 3,084 2,036 625 1,737 4,292 5,428 998 113   19,197
    55 to 59 506 1,570 1,260 377 697 1,397 1,545 1,758 1,268 5 10,387
    60 to 64 155 464 416 128 159 240 174 351 758 104 2,949
    65 to 70 33 50 50 11 32 34 14 29 63 47 360
    70 and Over 6 4 4 - 2 2 2 2 7 10 39
    Totals 12,491 42,870 20,289 8,202 14,197 20,790 11,396 3,199 2,209 166 135,809
    • "ibmaccountant" comments. Full excerpt: Janet, A most informative file. The Y-to-Y loss of personnel in the 1-4 year bracket is extraordinary. You can't tell if the loss of the new 0-1 year employees is that great (except maybe we see a little of it in 2001), but I'm shocked at the 1-4 year employee attrition. It's clear they are whittling down across the board over the years and at the same time massively churning the 0-4 crowd. If the press sees this, it should make for an interesting story.
  • Retiree Medical Cost by "chz_whiz". Full excerpt: Here's a hopefully interesting set of numbers showing medical costs for IBM retirees. There may be small geographic differences, but most of those differences are in HMO's which have not been included.
    Horizontally, the columns are "Previous Plan ," meaning annual employee health insurance premiums under the traditional retiree plan for 2005, and "FHA," being the annual Future Hell Account premiums for 2005. The 3rd column is the difference, being what IBM is presumably paying toward the former's coverage.
    Vertically is "Retiree Only," then the additional adder for a (previously acquired) spouse. The bottom section is rates for Retiree plus Spouse. Within each section is cost for a typical (?) EPO, Dental+, & Vision. Note that the IBM payment for a Retiree Only is about $5000, and for Retiree+Spouse is about $8000. This must give a weighted average of $7000 per retiree since that's what IBM says they are now paying (see next note).
    This also shows that FWIW, under the previous plan, IBM was paying about 80% of the retiree cost, and 50% of the retiree's (previously acquired) spouse's cost.
    Retiree Only Previous Plan FHA IBM's Presumed Payment for "Previous Plan"
    High Deductible PPO
    Medium Deductible PPO
    Low Deductible PPO
    Dental Basic
    Dental Plus
    EPO + Dental Plus + Vision
    Retiree and Spouse Previous Plan FHA IBM's Presumed Payment for "Previous Plan"
    High Deductible PPO
    Medium Deductible PPO
    Low Deductible PPO
    Dental Basic
    Dental Plus
    EPO + Dental Plus + Vision
  • Information Age: The $100bn diplomat. In contrast to many of his predecessors, Sam Palmisano is leading IBM forward with the relationship-building skills of a statesman. Excerpts: Unlike his pugnacious predecessor, Palmisano is an IBM lifer - in career and character. Over almost thirty years, he has proved himself in numerous roles: in marketing and sales; as head of the PC division; running the Japanese subsidiary; and leading first the service operation, then the enterprise systems group. That steady rise also included a stint as executive assistant to former CEO John Akers - a position generally reserved for rising stars. At each stage Palmisano impressed. [...] But it is his charm as well as his foresight that has fuelled his rise. "He really is a very likeable person and that is his biggest asset in getting people to do things for him," says Djurdjevic. "Unlike Gerstner, who always carried a metaphorical bat around to club people with, Palmisano can get things done with smiles and relationship skills." That has been a longstanding trait. As a student at the elite Johns Hopkins University, Palmisano was "popular, charming, and charismatic; he had a smile for everyone and an ability to make people feel at ease, an instant friend," says former classmate, Karl Kop, now a successful lawyer in California.
  • Wall Street Journal: Bush Is Pushing for Pension Reform. Chao Unveils Plan to Alter How Companies Will Fund Defined-Benefit Programs, By Michael Schroeder. Excerpts: Labor Secretary Elaine Chao unveiled a plan to replace what she called the current "outdated and ineffective" rules for funding pension plans with a simple formula that would ensure that companies make good on their retirement-benefit promises. The administration also would raise the pension-insurance premiums that companies must pay, to help reduce a growing deficit at the Pension Benefit Guaranty Corp., the agency that insures corporate pensions.
  • San Diego Union-Tribune: Voters may face choice to change state pensions to 401(k) plan. Excerpt: In a significant echo of President Bush's plan to privatize part of Social Security, an influential California Republican lawmaker and taxpayers group want California voters to begin a long-term privatizing of two of the nation's largest public pension systems. The change, if passed during a possible special election later this year, could eventually unravel much of the influence of the state's two massive public pension funds that manage more than $300 billion in assets. With holdings that rival the gross domestic product of many nations, the funds are major proponents for reforms on Wall Street and inside corporate suites, a role that has earned them high-profile opponents in U.S. business circles.
  • New York Times: Mayday? Payday! Hit the Silk! Excerpts: But Mr. Sosa's prospective goody bag seems meager when compared with the retirement piñata that the Bank of America plans to bestow on Charles K. Gifford when he steps aside as its chairman at the end of this month. An amiable, dedicated manager with a decidedly mixed track record as chief executive, Mr. Gifford, 62, has managed to survive strategic misfires, one bungled merger and another merger that kept him in the top ranks of the bank but no longer in control. For his ministrations, Mr. Gifford is promised a $16.36 million cash payment, up to an additional $8.67 million in "incentive payments" for work done over the last 13 months and $3.1 million a year for life. If he dies before his wife, she will receive $2.3 million a year, also for life. That's not all. The bank guarantees him $50,000 a year in consulting fees, 120 hours of free flight time a year on the company's jet, and an office and a secretary, according to federal securities filings. All of this is on top of $38.4 million in company stock that he has accrued over his 38-year career.
    Despite the brouhaha surrounding Mr. Raines, it is unclear whether corporate compensation committees plan to push for greater retirement disclosure and more modest payouts. Warren E. Buffett, the billionaire investor who is a longtime critic of corporate compensation practices, has said that getting clubby boards to question enormous executive paydays is like expecting well-behaved guests to start "belching at the dinner table." In their book, "Pay Without Performance" (Harvard University Press), Professor Fried and his co-author, Lucian Bebchuk, a Harvard Law School professor, contend that retirement pay is just the most recent hiding place for excessive compensation and that executive contracts are intentionally drafted to keep things quiet. "Compensation plan designers have an incentive to obscure or make more opaque the total value of an executive's compensation package," they wrote, "as well as to disguise the extent to which the form of compensation deviates from what best serves shareholders' interests."
  • New York Times, courtesy of Free Republic: Malpractice Mythology. Excerpts: "Tort reform," the Bush administration's answer to the problem of high medical malpractice costs, makes sense from only one aspect: the political. The genius of tort reform, which focuses on putting a cap on the awards from malpractice suits, is that it offends only one big-money lobbying group: trial lawyers, who are important financial supporters of the Democratic Party. Meanwhile, it helps or holds harmless Republican special interests in the insurance, drug and health care industries. The only problem is that it hurts the hapless patients who suffer grievous harm at the hands of incompetent doctors. [...] Politicians endorsing tort reform say a crisis of escalating malpractice insurance premiums is forcing doctors out of business. The extent to which this is an actual problem is murky. Insurance companies have substantially raised premiums for malpractice coverage for doctors in high-risk specialties like obstetrics and neurosurgery in some states, leading at least some doctors to curtail their services, retire or move. The White House laments that patients in some areas are thus forced to travel long distances to find, for example, obstetrical care. But when the Government Accountability Office visited five of the hardest hit states in 2003, it found only scattered problems and was unable to document wide-scale lack of access to medical care.
  • New York Times: Reform Effort at Businesses Feels Pressure, By Kurt Eichenwald. Excerpts: The white-hot movement to overhaul corporate governance has cooled in recent months in Washington and beyond, according to lawyers, institutional shareholders, executives, directors and other experts. [...] Signs of the growing battle over corporate reform and its ultimate politicization are everywhere, although many are hidden from public view. Soon after the presidential election, a group of senior financial executives from an array of firms and companies visited the White House for a private meeting with President Bush. According to people briefed on the meeting, the executives voiced their frustration with the intensity of the regulatory and legal efforts that their companies had faced since the corporate scandals broke three years ago.
    "It's clear to me that we are heading into some very uncertain waters, and that the Bush administration is willing to cut big business a lot of slack when it comes to corporate governance, which I think is a big mistake," said James W. Harris, president and chief executive of Seneca Financial, a merchant banking firm. Mr. Harris also serves on two other corporate boards. In recent months, Mr. Harris said, he has heard numerous directors complaining about the demands they now face for serving on boards, an attitude he says he has little patience with. "I was at a meeting of a group of directors back in the fall, and there was a lot of grumbling and groaning about all the extra work required now," he said. "My response was, 'Why don't you give back the check and get off the board?' Of course, none of them wanted to do that."
  • Wall Street Journal: Why It's Good to Be Rich, by Jonathan Clements. Excerpt: Life is a whole lot easier if you have a truckload of money. True, this isn't exactly an earth-shattering insight. But I don't think people really appreciate just how advantageous it is to get their finances under control and accumulate a decent dollop of wealth. Here are 25 financial benefits that are enjoyed by folks with fatter wallets...
  • New York Times: Health Care? Ask Cuba, by Nicholas D. Kristof. Excerpts: Here's a wrenching fact: If the U.S. had an infant mortality rate as good as Cuba's, we would save an additional 2,212 American babies a year. Yes, Cuba's. Babies are less likely to survive in America, with a health care system that we think is the best in the world, than in impoverished and autocratic Cuba. According to the latest C.I.A. World Factbook, Cuba is one of 41 countries that have better infant mortality rates than the U.S. Even more troubling, the rate in the U.S. has worsened recently. [...] Singapore has the best infant mortality rate in the world: 2.3 babies die before the age of 1 for every 1,000 live births. Sweden, Japan and Iceland all have a rate that is less than half of ours. If we had a rate as good as Singapore's, we would save 18,900 babies each year. Or to put it another way, our policy failures in Iraq may be killing Americans at a rate of about 800 a year, but our health care failures at home are resulting in incomparably more deaths - of infants. And their mothers, because women are 70 percent more likely to die in childbirth in America than in Europe.
  • Washington Post: Consolidation: Health Care's Empty Promise. By Steven Pearlstein. Excerpts: One of the hollow promises of the health care industry is that consolidation would benefit consumers. Bigger insurance companies would have more clout to negotiate lower prices from hospitals, doctors and drug companies. And bigger hospital groups would realize administrative and operating efficiencies while having the scale to invest in cost-saving new technology. Alas, it hasn't happened. Prices for just about everything medical are continuing to rise faster than everything else, with little or no evidence of improvements in quality. Instead, our reward seems to be the creation of local and national oligopolies characterized by less competition, less choice, higher prices and higher returns to shareholders.
  • For IGS and other road warriors, from the ACLU: Report Abuse of Airport "Pat-Down" Searches. Excerpt: Many people are reporting abuses during the passenger screening process in U.S. airports, including unnecessary groping of female passengers, untrained security screeners and arbitrary screening procedures. The ACLU is collecting individuals' stories in order to ascertain the scope of this problem and evaluate future action. If you have had such an experience, please help us by filling out the following questionnaire.

Vault Message Board Posts
Vault's IBM Business Consulting Services message board is a popular hangout for IBM BCS employees, including many employees acquired from PwC. Some of this week's posts follow.
  • "Recruiting roulette" by "Dose of reality". Full excerpt: Let F(x) represent the equation for number of staff hired at BCS. Then F(X) = A + B, where: A = Incremental market demand and; B = Number of replacement staff needed. Now you have implicitly presumed that the increase in hiring rate is due to A. We on the inside, and those that have recently transitioned to being on the outside, know that the increase in hiring rates is due to B.
    The staff exploitation, as detailed on this board has been going on for more than three years. The lip service that BCS has paid to its cheap compensation and other HR policies as being temporary has run its course. There is no more credibility. Also, options that were granted at the time of the PwC acquisition to the rank and file are vesting. Consequently, there has been a mass exodus the last three months, and we are scrambling to replace staff that have deserted ongoing projects, as well as to staff up any projects that may be sold.
    Orders are still coming in, since consulting is a long cycle business and until recently, we have had adequate sales staff to produce a modicum of new bookings. It will take a while before the talent dilution noticeably affects the pipeline, so commercially we may not appear to be a disaster. However, don't confuse short term profits with the organizational situation. Things are terrible for employees, and the increased hiring is just evidence of that. If there are enough gullible suckers that are willing to come in and work their a$$e$ off in good faith for a few years, revenue and profit can bottom out at a decent, though decidedly sub-optimal level. However, it will still be a lousy place to work. If you are happy to join a company just because it has projects, and have no concern about your career, then come on in. I suppose there is nothing wrong with charity work!
  • "Answers" by "Dose of reality". Excerpts: A few thoughts on the offer comparison. First, as far as the base salary difference, there are two not so subtle differences that will swing it decidedly back to Accenture. First, Accenture generally pays for overtime, BCS does not. I assume your offers are in the high 40 to mid 50 range. Working another 4 hours a week will get you to break even between the two offers. You will likely work 50 to 55 hour weeks as a bare minimum at either firm, so the advantage swings clearly to Accenture. Second, salary increases at BCS have been zero or NEGATIVE in each of the past three years. While the industry in general has been stingy with pay increases over that time period, Accenture did at least manage to give token raises.
    As far as the bonus goes, again, no bonuses have been paid the last three years. What you are quoted in your offer are bonus targets. However, payout requires that IGS/BCS makes its profit targets. The problem is that the profit targets are set ridiculously high, especially given the fact that all employees, from the most productive stars to the worst performers, have all been treated the same the last three years. Morale is terrible, and any initiative or incentive to perform, let alone excel, has been killed. It is tough to sell and deliver good results with an apathetic workforce. Bottom line – missed target = no bonus, and there is no indication this will change in the near future.
    As far as growth potential, you will not find it at BCS. Our HR philosophy is to bring in a constant supply of new recruits, make them think they will be rewarded for their efforts, burn them out through a few pay cycles, and let them leave. It is the farthest thing from a meritocracy I have ever seen in the corporate world. Since we don’t “pay for performance”, all but the worst performers leave after a few years. The only thing that can keep us going is getting fresh meat every few years, so your personal development is irrelevant to the equation.
    Your project assignment will be whatever is sold when you are sitting on the bench. Since we set utilization targets (% working hours you are expected to be on a project) at 90%+, there are very few staff members sitting on the bench when a project is sold. Consequently, the odds of a project being sold that is a good career fit for you are extremely low. The friendly, collegial atmosphere that was presented to you during the interview process was just recruiting hype. Of course, this is true at either organization. Pay range is irrelevant, since you will not be here long enough to move up in the range. If I told you that the upper end of manager (band 9) was 150k, you might be led to believe that you will make that in 8 years. Sorry, but that just doesn’t happen any more. Annual raises are 0 – 3%, with a majority of staff getting 0.
  • "Overtime" by "IBbluer_everyday". Full excerpt: Don't overlook the importance of paid overtime. There is a real psychological factor involved here. If a company has to pay you overtime, they will think twice before letting you work the overtime unless they are able to bill for each additional hour you work. And even if the company benefits from the overtime, at least you will be benefiting too. It provides a built in system of checks and balances. If a company does not have to pay you overtime, what incentive is there for the company to not have you work overtime? Ahhhh.... none. In fact, with each additional hour of overtime you work, the company product cost decreases, so their profit margin goes up. IBM even has resource usage targets that require X amount of hours that each employee has to contribute, and they are well above 40 hours per week.
  • "Ya gotta love it" by "deep_eye". Full excerpt: Where else but in the U.S. can you convince people to work their a's off for free? As if this is somehow in their best interests. Thanks for the update, I thought the pig was the only consultancy afflicted with forced-free labor expectations. Some years back, I had the pleasure of working on a project with a surgeon from Germany. Extremely bright guy, motivated, driven, focused - not some back water slaggard. He found the American model of worker exploitation and the relentless extraction of more free hours, quite amusing. Granted, he admitted the standard of living, purchasing power, etc., might be a tad lower in Germany, but they do not experience the stroke, heart attacks and burn outs rates anywhere near ours.
  • "A Rather Unexclusive Club" by "Dose of reality". Excerpt: Let me see what I can do to relieve whatever remaining interview angst you two might have. If you have read this forum, you know that we have had severe retention problems the past few years. Stagnant salaries, no bonuses, pervasive cost containment, excessive utilization targets, limited project and career opportunities are the primary causes.
    Since we haven’t done anything to address the root causes, recruiting has become extremely difficult. It is no longer necessary for applicants to have relevant experience in the service lines for which we are recruiting them. No one with competitive, marketable skills is willing to come and work here, and many entry level recruits are also up to speed on the environment. Therefore, our only recourse is to cast a wide net and look at any warm body that has anything remotely resembling general consulting skills. If you have an average resume, decent personal hygiene, and can string two sentences together in either a business or social setting, you’re in. We are that desperate. Don’t expect any deep technical or business process questions. We let virtually anyone in and separate the wheat from the chaff after you are hired. Most of the recruiting staff are generally clueless about consulting, so they couldn’t probe any deeper if they wanted to. You know the old saying about “Those that can’t, teach”. Here it is “Those that can’t. get a cushy job in HR”
  • "Random thoughts" by "Dose of reality". Full excerpt: Bottom line, I am not a fan of SP, DE, JJ. I don't know much about MW.
    SP - LG wannabee, hard core salesman - as a result a linear thinker, getting it done is more important than figuring out what needs to be done. Salesmen make the worst CEO's. No change agent, too much of an insider to be able to truly integrate the pieces of IBM - old school mentality of internal competition, despite lip service to the contrary.
    DE - responsible for the push down market in consulting services and proud of it. In total denial about where outsourcing is in its strategic life cycle - still thinks there is strong natural value proposition and high growth potential long term. Same with On Demand. His baby that he will follow right into the grave. "Principles of engagement" - equivalent of internal affairs in the police department. Instead of fixing the problem in the field he adds a layer of oversight - typical IBM. Linux - always a year away from breaking out.
    JJ - Poster boy for aggressive (read illegal) accounting practices in pension, revenue recognition and taxes. Another career IBM'er that was incapable of making the wholesale changes in finance that are necessary. Clings to old school planning processes that are sucking the life out of the front lines. We put a bean counter in charge of IGS - always a death knell for any business. It means we are in cash-out mode, and he is doing everything possible to accelerate it
    MW – Out of my realm. ITS is probably where he belongs. Calls for a plodding technocrat.
  • "response" by "CONsulting_2_long". Excerpts: Another great post, but a question. I did not understand your second point, "the content of this board has been played back..." Are you saying that MC and GR are getting reports on this board? In terms of your last point about standardizing the stupidity, I only offer you some insights on my experience. It me a long time to figure out why and anticipate the moves of BCS management. They defy common sense. However, I finally did, just before I left. You have call me a defender, when I was merely reiterating the party line, which I was troubled to have to sink to their depths to understand, kind of like a profiler on a crime spree.
    In a nutshell, to model BCS management accurately, you must:
    1. Stop thinking like a business man, owner or true leader. You must think like a clerk
    2. Adopt a defensive, fearful, self-loathing view of the world, honed from years and years at IBM
    3. You must never think of interdependencies. Life needs to be simple formulas, nothing complex. The line from the movie, The Usual Suspects, comes to mind, "for cops things are never that complicated. If you think that the brother did it, he must have."
    4. Adopt a short-term mentality. Monthly/quarterly. "strategy" is the full year plan. Anything above a year is like searching for the Unified Theory of Everything.
    5. Be willing to violate the trust of your peers and subordinates without hesitation. Those under you are mere pawns for manipulation. Never, never consider their needs over your own personal short-term needs
    6. Think of unit volume for services. Talk of quality and differentiation is something for politicking at internal meetings, not for actual practice
    If you can place these attributes into your model of IBM BCS, you will be remarkably accurate in explaining/predicting GR and the backup singers' actions. It is a sad tale. Truly astounding that BCS is as successful as it is. One wonders how it succeeds in spite of itself. When I figured this model out and validated it with several organizational and policy decisions, I came to a similar conclusion that the organization is beyond repair. I bolted and not a single shred of buyer's remorse on my new position.
    In the past, I wondered if a simple change of GR/MC would be sufficient to allow saner behaviours to prevail. However, I have concluded that most of leadership is truly rotten down through the PAL level. I had too many heart-to-heart meetings with BCS leadership where a sane, intellectual conversation is had in a pairs or groups of three or so. Many recognize the issues. Some even give 'bar talk' on how they will stand up and enact change. Sadly, in the next meeting with more than four 'leaders' present, they read from the teleprompter and leave anyone who leads a charge to fend for themselves. Again, like clerks in a convenience store.
    While I readily admit to being a bitter, disgruntled employee, I am still amazed that anyone with talent below the partner level remains. Further, shame for anyone who reads this board and joins. And frankly, I even wonder why any talented young Partner would remain. -- Oh, I remember, a boat load of options at $54. But even then Dose, it would be hard for me to keep coming to work in that environment.
  • "Latest Reconnaissance from the front lines" by "Dose of reality". Full excerpt: I’m not sure when you left, but the front lines that seemed to be holding early last year have been deserting in droves the past few months. Three years is enough for even the “dumbest wheat” to figure things out, a year of a better economy is making it easier to make a move, and options vesting is another catalyst. With a 12 – 18 month cycle for projects, and enough strong partner level client relationships to hold it together, the results haven’t been off that much. But the overhang is very real and pretty soon there won’t be enough experienced hands to bail water.
    You are absolutely right about the deficiencies in the culling process. Too little was done up front– somewhat hampered by the contractual arrangements in the acquisition agreement, but we should have bitten the bullet to get some headroom in our business economics. When we did make cuts, it was for the wrong reasons, and long after acquisition momentum had been squelched. There is no such thing as rational, impartial business decisions at IBM, especially when it comes to personnel.
    Hiring, retention, and compensation decisions are by far the most important and pervasive driver of long term corporate success. Everything else is derivative of this. It really is the root cause of the problems at IBM. Politics and nepotism drives this at the upper levels, and the resulting miscast executives and strategic mistakes drive this from the middle on down. Add to this an HR function that is lazy and inept, being staffed with generalist non-HR professionals that couldn’t cut it in operations, and a finance function that is clueless about business economics, with excessive power and influence, and the picture is complete.
    I am mulling over some angles on a book. It will probably be more of a general analysis of deficiencies in corporate management, with the PwC acquisition as one of many examples. I just don’t have enough of an institutional knowledge of IBM history to make it my central theme. I will leave that to ABC, who is eminently more qualified.

Coverage on Social Security Privatization
  • Washington Post: President of Fabricated Crises, By Harold Meyerson. Excerpts: Some presidents make the history books by managing crises. Lincoln had Fort Sumter, Roosevelt had the Depression and Pearl Harbor, and Kennedy had the missiles in Cuba. George W. Bush, of course, had Sept. 11, and for a while thereafter -- through the overthrow of the Taliban -- he earned his page in history, too. But when historians look back at the Bush presidency, they're more likely to note that what sets Bush apart is not the crises he managed but the crises he fabricated. The fabricated crisis is the hallmark of the Bush presidency. To attain goals that he had set for himself before he took office -- the overthrow of Saddam Hussein, the privatization of Social Security -- he concocted crises where there were none. So Iraq became a clear and present danger to American hearths and homes, bristling with weapons of mass destruction, a nuclear attack just waiting to happen. And now, this week, the president is embarking on his second great scare campaign, this one to convince the American people that Social Security will collapse and that the only remedy is to cut benefits and redirect resources into private accounts.
    In fact, Social Security is on a sounder footing now than it has been for most of its 70-year history. Without altering any of its particulars, its trustees say, it can pay full benefits straight through 2042. Over the next 75 years its shortfall will amount to just 0.7 percent of national income, according to the trustees, or 0.4 percent, according to the Congressional Budget Office. That still amounts to a real chunk of change, but it pales alongside the 75-year cost of Bush's Medicare drug benefit, which is more than twice its size, or Bush's tax cuts if permanently extended, which would be nearly four times its size. In short, Social Security is not facing a financial crisis at all. It is facing a need for some distinctly sub-cataclysmic adjustments over the next few decades that would increase its revenue and diminish its benefits. [...]
    In Bushland, it's always time to fabricate a crisis. We have a crisis in medical malpractice costs, though the CBO says that malpractice costs amount to less than 2 percent of total health care costs. (In fact, what we have is a president who wants to diminish the financial, and thus political, clout of trial lawyers.) We have a crisis in judicial vacancies, though in fact Senate Democrats used the filibuster to block just 10 of Bush's 229 first-term judicial appointments. With crisis concoction as its central task -- think of how many administration officials issued dire warnings of the threat posed by Saddam Hussein or, now, by Social Security's impending bankruptcy -- this presidency, more than any I can think of, has relied on the classic tools of propaganda. Indeed, it's almost impossible to imagine the Bush presidency absent the Fox News Network and right-wing talk radio.
  • New York Times: The Iceberg Cometh, By Paul Krugman. Excerpts: Last week someone leaked a memo written by Peter Wehner, an aide to Karl Rove, about how to sell Social Security privatization. The public, says Mr. Wehner, must be convinced that "the current system is heading for an iceberg." It's the standard Bush administration tactic: invent a fake crisis to bully people into doing what you want. "For the first time in six decades," the memo says, "the Social Security battle is one we can win." One thing I haven't seen pointed out, however, is the extent to which the White House expects the public and the media to believe two contradictory things. The administration expects us to believe that drastic change is needed, and needed right away, because of the looming cost of paying for the baby boomers' retirement. The administration expects us not to notice, however, that the supposed solution would do nothing to reduce that cost. Even with the most favorable assumptions, the benefits of privatization wouldn't kick in until most of the baby boomers were long gone. For the next 45 years, privatization would cost much more money than it saved. [...]
    We already have a large budget deficit, the result of President Bush's insistence on cutting taxes while waging a war. And it will get worse: a rise in spending on entitlements - mainly because of Medicare, but with a smaller contribution from Medicaid and, in a minor supporting role, Social Security - looks set to sharply increase the deficit after 2010. Add borrowing for privatization to the mix, and the budget deficit might well exceed 8 percent of G.D.P. at some time during the next decade. That's a deficit that would make Carlos Menem's Argentina look like a model of responsibility. It would be sure to cause a collapse of investor confidence, sending the dollar through the floor, interest rates through the roof and the economy into a tailspin. And when investors started fleeing because they believed that America had turned into a banana republic, they wouldn't be reassured by claims that someday, in the distant future, privatization would do great things for the budget. Just ask the Argentines: their version of Social Security privatization was also supposed to save money in the long run, but all it did was move forward the date of their crisis.
  • New York Times: The British Evasion, By Paul Krugman. Excerpts: We must end Social Security as we know it, the Bush administration says, to meet the fiscal burden of paying benefits to the baby boomers. But the most likely privatization scheme would actually increase the budget deficit until 2050. By then the youngest surviving baby boomer will be 86 years old. Even then, would we have a sustainable retirement system? Not bloody likely. Pardon my Britishism, but Britain's 20-year experience with privatization is a cautionary tale Americans should know about. The U.S. news media have provided readers and viewers with little information about how privatization has worked in other countries. Now my colleagues have even fewer excuses: there's an illuminating article on the British experience in The American Prospect, www.prospect.org, by Norma Cohen, a senior corporate reporter at The Financial Times who covers pension issues.
    Her verdict is summed up in her title: "A Bloody Mess." Strong words, but her conclusions match those expressed more discreetly in a recent report by Britain's Pensions Commission, which warns that at least 75 percent of those with private investment accounts will not have enough savings to provide "adequate pensions." The details of British privatization differ from the likely Bush administration plan because the starting point was different. But there are basic similarities. Guaranteed benefits were cut; workers were expected to make up for these benefit cuts by earning high returns on their private accounts. [...] "Britain's experiment with substituting private savings accounts for a portion of state benefits has been a failure," Ms. Cohen writes. "A shorthand explanation for what has gone wrong is that the costs and risks of running private investment accounts outweigh the value of the returns they are likely to earn."
  • Washington Post: Social Security Push to Tap the GOP Faithful. Campaign's Tactics Will Drive Appeal. By Mike Allen and Jim VandeHei. Excerpts: President Bush plans to reactivate his reelection campaign's network of donors and activists to build pressure on lawmakers to allow workers to invest part of their Social Security taxes in the stock market, according to Republican strategists. White House allies are launching a market-research project to figure out how to sell the plan in the most comprehensible and appealing way, and Republican marketing and public-relations gurus are building teams of consultants to promote it, the strategists said. The campaign will use Bush's campaign-honed techniques of mass repetition, never deviating from the script and using the politics of fear to build support -- contending that a Social Security financial crisis is imminent when even Republican figures show it is decades away.
  • Chicago Tribune: Investment pros see bonanza. Social Security proposal would add billions to investments and fees. Excerpts: The prospect of 100 million Americans each having $1,000 of their Social Security contributions to invest every year has investment professionals salivating at the potential financial bonanza. About $100 billion a year would be freed up for stocks, bonds and other investments under a tentative plan President Bush has floated to fix the Social Security retirement system by creating private investment accounts. The fees paid to brokers and money managers could run into the billions. [...] "The potential for investment firms has to be mouthwatering," said Michael Falk, chief investment officer with Chicago-based ProManage LLC, which helps workers manage their employer-sponsored 401(k) accounts. "We're talking about billions of dollars."
    In this politically charged environment, major financial companies are concerned about being painted as greedy. They are reluctant to speak out, let alone publicly endorse private accounts. When asked about private accounts, several companies, including American Express Financial Advisors, Edward Jones & Co. and Charles Schwab & Co., declined to comment [...] But behind the scenes, investment firms and other pro-privatization business groups have reportedly met with White House and Congressional leaders. Many executives also raised millions of dollars in campaign contributions to Bush and other Republican leaders.
  • New York Times: Wall Street Hears Pitch for Social Security Plan. Excerpts: Treasury Secretary John W. Snow began a three-day sales effort on Monday to drum up Wall Street support for President Bush's plans to overhaul Social Security. [...] In private meetings, Mr. Snow will confer with top executives from the biggest bond-trading firms on Wall Street and is expected to argue that such borrowing would more than pay for itself at the end of 75 years. Industry executives said the meetings would include firms like Goldman Sachs, J. P. Morgan Chase and Lehman Brothers. Mr. Snow is also expected to meet with brokerage firms and mutual fund companies that could end up managing the personal savings accounts.
    But several Wall Street economists expressed doubts about the potential impact on interest rates from floating hundreds of billions of dollars of additional government bonds at a time when it is not clear how the Bush administration is planning to reduce the existing budget deficit. "The overall impact on the Treasury market would be negative," wrote Kathleen Bostjancic, a senior Merrill Lynch economist, who estimated that the administration plan could lead to increased government borrowing of $54 billion to $120 billion a year for the next 20 years. [...] Few specialists, however, accept the administration's argument that the huge borrowing years ahead would have no impact on Treasury prices. Bond investors would be confronted with a very tangible deluge of new Treasury securities to buy and a much hazier promise to reduce borrowing in 30 to 60 years as the government cuts back on future Social Security benefits. "What if the government comes under pressure to bail out people in the future?" asked Ms. Bostjancic of Merrill Lynch. "You could have even more borrowing."
  • New York Times: For the Record on Social Security. Excerpts: Late February is now the time frame mentioned by the White House for unveiling President Bush's plan to privatize Social Security. The timing is no accident. By waiting until then, the president will conveniently avoid having to include the cost of privatization - as much as $2 trillion in new government borrowing over the next 10 years - in his 2006 budget, expected in early February. In this and other ways, the administration is manipulating information - a tacit, yet devastating, acknowledgement, we believe, that an informed public would reject privatizing Social Security. For the record:
    The administration has suggested that it would be justified in borrowing some $2 trillion to establish private accounts because doing so would head off $10 trillion in future Social Security liabilities. It's bad enough that the $10 trillion is a highly inflated figure, intended to overstate a problem that is reasonably estimated at $3.7 trillion or even considerably less. Worse are the true dimensions of the administration's proposed ploy, which were made painfully clear in a memo that was leaked to the press last week. Written in early January by Peter Wehner, the president's director of strategic initiatives and a top aide to Karl Rove, the president's political strategist, the memo states unequivocally that under a privatized system, only drastic benefit cuts - not borrowing - would relieve Social Security's financial problem. "If we borrow $1-2 trillion to cover transition costs for personal savings accounts" without making benefit cuts, Mr. Wehner wrote, "we will have borrowed trillions and will still confront more than $10 trillion in unfunded liabilities. This could easily cause an economic chain reaction: the markets go south, interest rates go up, and the economy stalls out." [...]
    Mr. Bush's reason for ignoring the far more pressing problem of Medicare while he pursues Social Security privatization is especially tortured. Over the next 75 years, the mismatch between revenues and Medicare benefits for doctors' care and prescription drugs is 3.5 to 6 times as much as the shortfall in Social Security, according to the Center on Budget and Policy Priorities. The Medicare hospital trust fund mismatch is two to three times as big. Asked by a reporter last month why he wouldn't tackle Medicare first, Mr. Bush said that his administration had already taken on Medicare by pushing through the $500 billion-plus prescription drug benefit. Drug coverage, he said, would save money for Medicare by paying for medicine that would prevent the need for expensive heart surgery. "I recognize some of the actuaries haven't come to that conclusion yet," he said. "But the logic is irrefutable."
    Logic? That thinking is wishful to the point of being magical. Medicare is not going to fix itself any more than tax cuts will pay for themselves. And Social Security is not a crisis for which enormous borrowing, huge benefit cuts and risky private accounts are a solution. Rather, it's a financial problem of manageable proportions, solvable without new borrowing by a combination of modest benefit cuts and tax increases that could be distributed fairly and phased in over several decades, while guaranteeing a basic level of inflation-proof income for life.
  • Reuters: U.S. pension plan called more radical than problem. Excerpts: Few countries have attempted social security shake-ups as far-reaching as those mooted by the current U.S. administration, even though many economists argue the U.S. system is least in need of radical surgery. [...] While many nations in Europe and elsewhere introduced indexation changes, fewer have dabbled in individual accounts. The UK, Sweden and Australia are cited as examples but none designed such accounts to replace the existing structure. Only Chile took these on as a mainstay of its pension system in 1981 amid sweeping market reforms of its economy. Proponents say Chile's system works, has high participation rates, high investment returns and buoyant stock markets. Critics say management fees there are huge and eat into those returns while incomes of many poorer retirees remain paltry. [...]
    For some, changes to Britain's system in the past 20 years provide the most appropriate model for the United States. British workers can opt out out of a top-up state pension contribution in favor of private or occupational schemes. But there is rising concern about the effect of recent stock market losses on poorer UK workers, and already the government has set about seeking ways to reform again. "In the UK, there are a lot of problems with the private accounts aspect of the retirement system and it seems odd to me that the U.S. seems to be going in that direction," said Vincenzo Galasso, professor at Bocconi University in Milan.
  • Bloomberg: Does It Matter Who Saves, You or the Government? By Caroline Baum. Excerpts: If workers are allowed to divert a portion of their earnings to private retirement accounts, as the president would like, the government has to come up with money for the old folks. The options are the same as they'd be under the current pay-as-you-go system: borrow the money, raise taxes, cut benefits, or some combination of the three.
    Voodoo Accounting. To the extent that every dollar diverted to private accounts adds a dollar to public borrowing, the effect on national savings is zero. "Shifting the ownership of these assets from the government to individuals does nothing to add to the pool of savings available to finance investment," says Doug Lee, president of Economics from Washington, an independent consulting firm in Potomac, Maryland. That's how most economists see it. Financing the transition by borrowing is a wash in terms of the effect on national savings, at least from an accounting perspective. Someone -- individuals, businesses or the government -- has to cut back on his spending in order for savings to increase. There's another way to look at it, however. Forget the voodoo accounting the government uses, which would attract the regulatory wrath of Eliot Spitzer if the government were a publicly held company. In the real world, there is no saving going on now under the Social Security system. It's a transfer plan, not a savings plan.

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