Pay as you go

Pensions piss me off.

 

Of course, they are great when they work.  My grandfather-in-law can attest to that.  (He's an actuary's nightmare, soon to begin his 4th decade as a pensioner.)

 

However, pensions often do more harm than good.  They put retirees (and future retirees) at risk, and they can cause tremendous tension in the worker/management relationship.  Plus they turn a basic fee-for-service arrangement into a crapshoot, gambling retirement benefits against a company's future viability.  I'll go into detail on these (and other) points another day.

 

What's a better alternative than pensions? 

 

"Pay as you go."

 

Companies should give workers every penny of what they earned each month.  Workers then choose how to allocate their earnings among different investment and benefit options.   With no pension vesting/funding obligations haning over their heads, employees and employers can part ways at any point without screwing each other over.

 

Here's what I want to see...  I want to see companies give each worker a complete accounting of his/her total compensation cost...  Salary plus employers' share of taxes, plus health benefits, plus pension contributions, plus workers' compensation and liability insurance, plus subsidies for commuting, gym memberships, day care, parking, etc.  Here's an example:

 

Nominal Salary: $50,000

Employer's FICA: $3,825

Unemployment / Disability: $500

Actuarial Pension Obligation: $10,000

Health Care Premiums: $4,800

WC / Liability Insurance: $4,000

Subsidies for parking, etc.: $1,200

Total Annual Employee Cost: $74,325

 

Employee's take-home pay after income tax withholding (30%): $35,000

Total taxes & benefits:$39,325

 

Showing these numbers would do a few things.  First, it would make apples-to-apples comparisons a lot easier for people looking to switch jobs.  More importantly, it should shock people to see how inefficient current compensation practices are (due largely to perversions in the tax code).  Hopefully that would spark an interest in some overdue tax reforms.

 

But the most basic reason to show these numbers: it would make clear once and for all what the deal is between a worker and employer.  For the work done in the past month, the fee is $74,325.  There are no IOU's, no future benefits...  Performance in exchange for consideration.  At the end of the month, both parties are even. 

 

If one believes the deal is unfair, there can be a renegotiation, or both parties can part ways.  There would be no pension overhang keeping them together in spite of growing dissatisfaction.

 

Ah, well.  The idea is well developed, but this posting is not my most coherent.  Give me some time to polish it up.

 

G'night.

Master of my gastric domain

Some guys at work started a weight-loss contest. They thought I should join. I figured they had a point, so I did.

There are steep financial penalties for failure to shed the pounds. (We all have a common target percentage.).

So far, I've eaten right for almost a week. That's about equal to my total number of good days all last year. Plus this'll be my 5th day of serious exercise in a row. That's more than I mustered since before Halloween.

Given that my weight was fairly stable for the past 6 months, this dramatic relative improvement in my diet and exercise regimen should get me where I need to be.

The hard part will be staying there (or even getting healthier still).
Stephen W. Stanton
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Sent from a BlackBerry (big thumbs on tiny buttons).

DayByDay is Funny

I wrote the last post in a hurry. I tried to edit it, but Blogger is really starting to piss me off. It all showed up as gobbledygook in my editor.

Grr.

But I wrote the whole blogroll link while home sick yesterday. I was a bit tired cranky, and it was perhaps not the best time to be criticising other folks. I was incapable of fairness.

So here are two caveats to my posts of the last few days.

1. My Blogroll and my post about it are in no order of preference. The Blogroll is kept in reverse chronological order as of most recent posting. Some sites do not register their updates, so they are stuck at the bottom. My blog post took a snapshot of the Blogroll as it stood Sunday afternoon.

2. DaybyDay is funny. By "not as funny as it used to be", I should have been clear. The strip used to make me pee my pants. Full-on. Now that I have built up a tolerance for its humor, only a few drops slip out. Still damn funny, and occasionally pee-able. In beauty terms, it went from Angelina Jolie down to Eva Longoria. Still mighty fine. Just not, you know, AJ.

Not a Republican Anymore

I'm certainly no Democrat, either.  I'm not quite as draconian as the official Libertarian platform.  I'm politically homeless. 

 

There was a time when it was easy to be a proud Republican.  Reagan helped.  Bush 41 had his moments.  Heck, Bush 43 had his (just not lately).  But it was in 1994 that I was most proud.  Newt Gingrich made a whole hell of a lot of sense.  He hasn't stopped since. 

 

But the party stopped listening.

 

Here's what first caught my eye in 1994.  It was the Contract with America.  Most of the text is in italics below, with my comments in plain font describing departures from the GOP of today:

 

On the first day of the 104th Congress, the new Republican majority will immediately pass the following major reforms, aimed at restoring the faith and trust of the American people in their government:

FIRST, require all laws that apply to the rest of the country also apply equally to the Congress;

 

Hmm...  Republicans seem to fall a bit short of the mark here.  What would be considered "insider trading" or even "bribery" in the private sector is called "lobbying" or "fund raising".

SECOND, select a major, independent auditing firm to conduct a comprehensive audit of Congress for waste, fraud or abuse;

 

Ha.  Congress specializes in waste and abuse.  Fraud I can't prove...  But I haven't really tried.  Republicans fail miserably here.

THIRD, cut the number of House committees, and cut committee staff by one-third;

 

If only I could get my grass to grow as well as Congressional committee and staff budgets...

FOURTH, limit the terms of all committee chairs;

 

So committee members rotate.  Big deal.

FIFTH, ban the casting of proxy votes in committee;

 

?

SIXTH, require committee meetings to be open to the public;
 

Good idea in principal.  In practice, it just gives politicians another chance to grandstand and precious little opportunity to have serious discussions about the best way to govern.

 

SEVENTH, require a three-fifths majority vote to pass a tax increase;

Wish it were so.  Actually, Republicans have been doing a good job on tax rates.  Lousy job on tax costs (complexity, compliance, crushing long term debt overhang due to spending binges).

EIGHTH, guarantee an honest accounting of our Federal Budget by implementing zero base-line budgeting.

 

Hardly.  In a true zero base-line budget, every penny of spending needs to be justified.  This should always lead to cuts as some programs are found ineffective, inefficient, obsolete, etc.  Instead, we get hikes, hikes, hikes...  And the rhetoric reinforces it.

 

Thereafter, within the first 100 days of the 104th Congress, we shall bring to the House Floor the following bills, each to be given full and open debate, each to be given a clear and fair vote and each to be immediately available this day for public inspection and scrutiny.

1. THE FISCAL RESPONSIBILITY ACT: A balanced budget/tax limitation amendment and a legislative line-item veto to restore fiscal responsibility to an out- of-control Congress, requiring them to live under the same budget constraints as families and businesses.

 

A line-item veto would be great, though perhaps unconstitutional.  Maybe each bill passed could have a severability clause stipulating that the president may strike any line item, rather than a blanket change in presidential powers.

 

As for the budget amendment...  Love the idea, but we can't get these a-holes to stop even the most egregious lumps of porkfat from being over-funded.

2. THE TAKING BACK OUR STREETS ACT: An anti-crime package including stronger truth-in- sentencing, "good faith" exclusionary rule exemptions, effective death penalty provisions, and cuts in social spending from this summer's "crime" bill to fund prison construction and additional law enforcement to keep people secure in their neighborhoods and kids safe in their schools.

 

Republicans remain tough on crime.  Perhaps even too tough on non-crimes. 

3. THE PERSONAL RESPONSIBILITY ACT: Discourage illegitimacy and teen pregnancy by prohibiting welfare to minor mothers and denying increased AFDC for additional children while on welfare, cut spending for welfare programs, and enact a tough two-years-and-out provision with work requirements to promote individual responsibility.

 

Republicans and Democrats are off to a good start.  Much, much more needs to be done.  Throwing debit cards at Katrina victims is not helping matters.

4. THE FAMILY REINFORCEMENT ACT: Child support enforcement, tax incentives for adoption, strengthening rights of parents in their children's education, stronger child pornography laws, and an elderly dependent care tax credit to reinforce the central role of families in American society.

 

Never really liked this one.  The parental involvement in education is good, and kiddie porn is just abominable...  But mucking about with tax credits is a bad idea.  That's what the GOP specializes in, though...  Tax complexity.

5. THE AMERICAN DREAM RESTORATION ACT: A S500 per child tax credit, begin repeal of the marriage tax penalty, and creation of American Dream Savings Accounts to provide middle class tax relief.

 

Again, lowering the tax burden is good, and the GOP is doing all this stuff....  But it comes at the expense of simpler, fairer, more efficient taxes.

6. THE NATIONAL SECURITY RESTORATION ACT: No U.S. troops under U.N. command and restoration of the essential parts of our national security funding to strengthen our national defense and maintain our credibility around the world.

 

Republicans are doing a great job here.  Give credit where it is due.

7. THE SENIOR CITIZENS FAIRNESS ACT: Raise the Social Security earnings limit which currently forces seniors out of the work force, repeal the 1993 tax hikes on Social Security benefits and provide tax incentives for private long-term care insurance to let Older Americans keep more of what they have earned over the years.

 

I think the GOP is sticking to the plan.  Not sure.  Too young to follow this issue closely.

8. THE JOB CREATION AND WAGE ENHANCEMENT ACT: Small business incentives, capital gains cut and indexation, neutral cost recovery, risk assessment/cost-benefit analysis, strengthening the Regulatory Flexibility Act and unfunded mandate reform to create jobs and raise worker wages.

 

Cap gains cuts: Done.  Indexation: not done.  Pain in the butt if they ever do it.

Incentives: Sorta.  All over the place.  Targeted incentives are a pain in the butt, but they do some marginal good, and the GOP loves 'em.

Regulatory reform: Ha.  The GOP has allowed and even encouraged regulations to swell to unmanageable proportions.

9. THE COMMON SENSE LEGAL REFORM ACT: "Loser pays" laws, reasonable limits on punitive damages and reform of product liability laws to stem the endless tide of litigation.

 

Some marginal progress here, and only in the past year or two.  No loser pays yet, but it'd be nice.

10. THE CITIZEN LEGISLATURE ACT: A first-ever vote on term limits to replace career politicians with citizen legislators.

I will eat a bowling ball if, within the next 4 years, the GOP limits their own congressional terms to less than 20 years.

 

 

So there you have it... The Contract with America is, for the most part, long dead.  I mourn it.  And I wonder whether to vote Libertarian or Republican in the next few cycles.  Democrats are still worse than the GOP, but not by much.   I wonder if a large protest vote for a third party would scare the GOP into rediscovering its principles, or if it would make them shift further left..

Jay Tea, CVS, Katrina, and The Virtue of Greed

Every now and then, a few people on my side of the ideological fence falls into the same trap as the anti-corporate lefties.  They buy into to false dichotomy: Either Corporations are making money, or they are serving society.  Never both.  Perhaps there can be some sort of trade-off, doing one at the expense of the other here and there.

Surprisingly, Jay Tea fell into that trap.  I was shocked.  He knows better.  If you read the last sentence of his post, he clearly demonstrates that he knows better.

Here's what I wrote to Jay in the comments thread:

Jay,

The first commenter got it exactly right.  Maximizing shareholder value is about more than just a short-sighted exercise in number crunching.  (Cut a few costs here, raise a few revenues there and your cash flows go up...  Along with the related NPV and share price.) 
What drives value?  Long term cash flows.  Where do those cash flows come from?  Revenues minus expenditures.  Where do those revenues come from?  Customers, mostly.  Give customers a reason to choose your company, then your revenues go way up.  Similarly, if you give them a reason to remain loyal, your marketing expenses go way down.
I am 100% in favor of the wealth-maximization doctrine.  Literally 100%.  It is a fallacy shared by many on the left (and some on the right) that wealth maximization somehow conflicts with ethics, morals, compassion, and just generally being a good neighbor.
Reputation has value.  Real value.  Often, the value of a firm's reputation exceeds the nominal value of all of the assets on its books. 
Take Arthur Andersen, for example.  When I worked there in the 90's, the firm's reputation was stellar.  The firm had almost no assets. Office furniture, some computers, a few small bank accounts, but that's it.  No factories, no stores, no inventories, no hordes of cash..  It made billions in revenues based on its reputation.
When its reputation was tarnished, the firm collapsed.  Management's short-sighted attempt to avoid the cost of a lawsuit killed the entire firm. 
Conversely, CVS is willing to spend a few bucks to establish a reputation as a true neighborhood pharmacy.  It cares.  It helps communities.  It is a partner.

The company will likely be rewarded.  This was an excellent business decision.  If the CEO and Board of directors were a bunch of soulless puppy-kickers, they would have made this same decision based entirely on dollars and cents.

Now this was just a superficial overview.  Experts in branding, marketing, leadership, and corporate governance could give you a much more sophisticated view of how to maximize ROI on investments in reputation.  To be sure, corporate philanthropy is not always (and not even very often) a wise investment.  However, there are times when a company's can get a lot of bang for the buck by doing the right good deeds.

It boils down to reputation.  A company needs to build and maintain a reputation as a trusted business partner.  If practical, a company should try to become the preferred business partner for its potential customers.  That means being a good neighbor and pitching in here and there.  (It doesn't mean becoming a sucker and letting special interests call the shots.)

When it comes to the value of corporate reputation, Alan Greenspan is a far better advocate than I.  Look here:

While acknowledging the ability of competition to promote growth, many such observers, nonetheless, remain concerned that economic actors, to achieve that growth, are required to behave in a manner governed by the law of the jungle.
In contrast to these skeptical views, the ethical merits of market-driven outcomes are argued with increasing vigor by many others, especially in the United States: The crux of the argument is that because unencumbered markets reflect the value preferences of consumers, the resulting price signals direct a nation's savings into those capital assets that maximize the production of goods and services most valued by consumers. Largely unfettered markets create a consumer-led society. In such an economy, the value of reputation, capitalized as good will in the market value of companies, competitively encourages perseverance in pursuing the objectives of quality and excellence.

In a nutshell, corporations do what the people want.  Why?  Because serving the people is the patch to riches.  Screwing people over is a way to tarnish your reputation and lose customers.

In another speech Greenspan explains how no amount of regulation can replace the importance of reputation:

Over the past half-century, societies have chosen to embrace the protections of myriad government financial regulations and implied certifications of integrity as a supplement to, if not a substitute for, business reputation. Most observers believe that the world is better off as a consequence of these governmental protections. Accordingly, the market value of trust, so prominent in the 1800s, seemed by the 1990s to have become less necessary.
But recent corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws and regulations of the past century have not eliminated the less-savory side of human behavior. We should not be surprised then to see a re-emergence of the value placed by markets on trust and personal reputation in business practice.

Basically, the value of "trust" is much higher than whatever amounts would be saved by cutting the wrong corners and screwing people over. 

Admittedly, Greenspan's speeches focus on integrity, not benevolence.  When he speaks of a firm's reputation, he means the confidence people have in the firm's word.  The company will do what it says.  It will live up to its end of the deals it makes.  It will stand behind its products.  Customers, suppliers, lenders, and investors know that the company is not out to cheat them.

A reputation for honesty is a good start.  But company's reputation can go so much further than that.  Consider whether the following scenario is good business: 

Company A goes into a blighted community to build new offices.  It could just put a building in place and call it a day.  Instead, it works with the locals and spends a few million bucks on parks, schools, transportation, and security.  The company develops a public atrium, and displays free movies for the general public on some nice nights.

Is this a good investment?

The correct answer is "maybe".

For the answer to be yes, the value of that investment needs to exceed the cost. That value can manifest itself in many ways.  First, the company may have an easier time hiring good people in that office.  Second, the company may have a much easier time working with the local government.  Third, the local citizens may spread excellent PR about the company via word-of-mouth.  Fourth, the company's efforts may be made known to people across the globe, attracting lots of new revenues from customers who approve of these business practices.  Fifth, the company may be able to obtain preferential treatment from suppliers and potential partners who want to share the credit.

However, there are no guarantees.  The investment in the community could be wasted.  The parks could become a haven for crackheads.  The school contributions could be wasted on counterproductive initiatives.  The transportation dollars could be squandered on expensive trolleys and shuttles that are useless to all working people.  All of these millions could be for naught.  The shareholders' money would be flushed down the toilet.

Back to Jay Tea's post...  CVS has decided to stick it out in the South.  Good for them.  Hopefully, this move was good business as well as good corporate citizenship.  At the very least, I hope it was a business decision with a positive NPV based on a calculated risk.

But if the CEO and the Board were simply spending shareholder money on Katrina relief efforts willy nilly...  Shame on them.  We rely on our for-profit sector to allocate capital efficiently so shareholders have the maximum amount of resources to use as they see fit.  If CVS squandered shareholder resources, they should be punished.  Period.