[A-List] Falling rate of profit and pensions crisis

["Keaney Michael" <Michael.Keaney@xxxxxx>]

The profits squeeze that threatens pensions

Barry Riley
Lombard
Financial Times: August 5 2002

In the late 1990s various governments faced with challenging demographic
projections had a great idea. The stock markets were booming, so why not
persuade their citizens to invest in personal pension funds? It seemed
like a wonderful strategy for offloading what promised to become an
insupportable liability to pay public sector pensions.

The UK, Germany and Sweden are among the nations to have embarked on
this course (but not France). In the US, the Cato Institute mounted an
energetic campaign to privatise Social Security. But what will happen if
things go wrong? The stock markets are looking sick, and default rates
are mounting in corporate bonds. If these saving do not deliver
worthwhile pensions the costs might rebound on to the public sector.

The assets citizens are being persuaded to buy are basically corporate
sector securities. They can also buy government bonds, but these have
been in generally short supply and yields are low; anyway, private
pensions funded by government bonds are state pensions in disguise.

Future pensions therefore will be dependent on the corporate sector's
profits, which will finance dividends on the stocks and the interest on
the bonds. Although governments have not yet thought this through, they
must support corporate profitability or pensions targets will not be
achieved. In contrast, governments have regarded companies as soft
targets for easy money raising. Gordon Brown, the UK's Chancellor, of
course, taxed existing occupational pension funds for £5bn a year on
their previously exempt dividend income. Various governments, the
greediest being Germany, have pillaged the telecoms industry, which
partly as a result of the 3G licence costs, is now suffering financial
collapse.

The US, too, resorted to squeezing its corporate sector. Globalisation
was a means of bringing in cheap imports to fill the shopping malls and
hold down inflation. The strong dollar was regarded as a symbol of
American power. But it all mounted to an attack on profitability,
especially in manufacturing, although many companies succeeded in hiding
the damage from the world -- for several years, anyway. Last week's
latest official statistics for US corporate profits (not the Enronised
versions produced by Arthur Andersen) showed pre-tax profits down 15 per
cent between 1997 and 2001, during what was supposed to be an economic
boom. The UK has followed some way down the same path. Imports are very
high, with a big trade gap, and manufacturing sector profits are very
weak (though services sector profitability is reasonably good). The
debt-financed consumer boom has been remarkable, but is now ending.
Companies are backing away in large numbers from the high costs of their
final salary pension plans, while returns on pension fund investments
are crumbling.

The simple conclusion is that it is quite pointless to pursue a private
pensions strategy without combining it with a strong profits strategy.
Being anti-inflation, moreover, can mean being anti-profits.