The Plight of Enron's Employees: A Larger Lesson

["Charles Brown" <CharlesB@xxxxxxxxxxxxxxxxxxxxx>]

The Plight of Enron's Employees: A Larger Lesson

>From LA Daily News, 2/5/02, p. 13:



By Daniel J.B. Mitchell*

The Enron bankruptcy has focused media attention on stock
market losses suffered by Enron employees.  Recent
revelations indicate that Enron executives - despite
knowledge of their firm's shaky financial situation -
encouraged employees to hold Enron stock in their
tax-subsidized 401k retirement accounts.  Many employees
lost the bulk of their retirement savings as a result.

Less attention has been paid to the fact that as Enron
employees lose their jobs, their other employer-provided
benefits - such as health insurance - are also at risk.
Indeed, employees at any firm - whether properly managed or
not - risk losing benefits if they are laid off or if the
firm goes bankrupt.  Even apart from layoffs and
bankruptcies, employers have great latitude to change their
benefit policies or to terminate benefit programs.
Benefits can be here today, gone tomorrow.

So, are there any benefits NOT at risk for Enron employees,
or employees at any other firm?  The most important such
benefit is Social Security - which provides pension,
disability, and retiree health care to most American
workers.  Employees who are laid off and find jobs
elsewhere take their Social Security eligibility with them.
Employers do not determine Social Security benefit policies
- that is left to Congress.  Social Security, in short, is
portable from job to job and unaffected by the fate or
actions of any one company.

The Enron saga thus points to a larger lesson.  Much of
America's social welfare system was built up soon after
World War II on the basis of tax incentives to employers.
Employers were thereby encouraged to provide
company-by-company benefits.  These tax incentives have
become among the most costly to the federal Treasury.  Yet
the postwar system was premised on an employment
relationship that no longer is relevant: a male breadwinner
working an entire career for a large employer.  If the
breadwinner were a professional or managerial employee, it
was assumed that the employer would take a paternal
interest in his welfare.  And if he were a blue-collar
worker, it was assumed that a union contract would protect
him.

Today, few professional and managerial employees expect to
work 30-40 years at a single firm.  And unionization in the
private sector has fallen below 10% of the workforce.  All
workers must worry about the impact of job mobility,
company bankruptcy, or simply changes in employer policy on
their job-based benefits.

Given these changes in the employment relationship, social
welfare concerns - pensions, health care, life and
supplementary disability insurance - ought not to remain
the responsibility of individual employers.   Social
Security - while it will need reforms as the retirement of
the baby boomers nears - must retain a central role in
national retirement policy.  Individual saving accounts -
independent of any one employer -are another important
element.  More complicated, but no less essential, is the
creation of a core health insurance system that is portable
from job to job.

And what about the job-based stock ownership and stock
option plans that were the rage of the 1990s and that
figured so prominently in the Enron fiasco?  If employers
want to subsidize such plans on the assumption that they
enhance employee motivation, they can continue to do so.
After all, employers have long used other incentives, such
as factory piece rates and sales commissions, as
motivational tools.  But stock-based incentive plans have
little to do with retirement and should not continue to
enjoy tax subsidies.

*Ho-su Wu Professor, Anderson Graduate School of Management
and School of Public Policy and Social Research, UCLA.
Address: c/o Anderson Graduate School of Management, UCLA,
Los Angeles, CA. 90095-1481, phone 310-825-1504; fax
310-829-1042, e-mail:
daniel.j.b.mitchell@xxxxxxxxxxxxxxxxxx
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