December 30, 2008

Collapse of the Global Economy

Britain: Financial Crisis Threatens Pensions and Retirement Plans

December 15, 2008

WSWS - A little discussed aspect of the global financial crisis is the devastating impact it is having on pensions. This is particularly acute in Britain. State provision is poor and successive governments have forced workers to rely on occupational pensions, on which half of all British workers depend, private pensions and annuities, and the value of their homes to finance their retirement.

In the last year, the London stock market has fallen by nearly 40 percent and deficits in UK occupational pensions in the top 100 corporations have leapt from £40 billion a year ago to more than £122 billion in October of this year if more realistic estimates of their liabilities are used.

The top 100 companies were trying to pull the wool over the public’s eyes by reporting pension surpluses of £22 billion in September in order to avoid increasing their pension contributions as a result of over-optimistic estimates based on financial sector bond yields. David Robbins, consulting partner at Deloitte, said, “From an audit perspective, using yields on financial bonds [to calculate liabilities] lacks credibility.”

The majority of final salary pension schemes did not have enough assets to cover their pension commitments in October, with 6,468 (84 percent of the total) in deficit and only 1,273 (16 percent) still in surplus. This contrasts with 3,121 in surplus a year ago. Their collective deficit stood at nearly £100 billion, an increase of nearly £20 billion on the month before. At the same time last year, the schemes had a surplus of £84 billion.

These deficits have not arisen just because of the stock market crash. Over the last 25 years, companies have taken pension holidays when the pension funds were in surplus and used the money to fund generous dividend payouts. Successive governments have done nothing to ensure that what was taken out was repaid.

While the Pensions Regulator has written to the trustees of all the UK pension schemes calling on them to be vigilant in these “unprecedented times”, he has not required a change in their valuation. If schemes are in deficit, employers have to make good the shortfall, typically over 10 years. However, the regulator acknowledged that to do so, even 10 years might be impossible under present circumstances.

Companies have sought to limit benefits to cut costs by closing schemes to new members, raising the retirement age and basing retirement income on career average rather than final salary. Even so, fears are now being expressed that they will take even more drastic action by stopping any future accrual for existing members. If, for example, someone whose pension was based on the annual accrual rate of 1/60th and had worked for 20 years, he or she would be entitled to 20/60—a third of their final salary—on retirement. But if a company stopped accrual after 10 years, the pension would be worth only half that amount.

Retirees face a further threat. As pension deficits soar and the economic slump forces companies into bankruptcy, the Pension Protection Fund (PPF), an insurance fund set up by the government to meet the pension bill of insolvent companies, will be wiped out.

The Financial Times reported that the PPF deficit has been updated to £155 billion as at end of November, an increase of £30 billon in one month and three times what it was last year. The companies with the largest deficits include BT, BA and BAe systems, former state owned enterprises which once had pension funds in surplus.

As it is, the PPF is very limited. It only pays out 90 percent of the promised pensions, up to a limit of £28,000, and does not provide indexation on most benefits in line with inflation. It is therefore deemed to cover only 70 percent of the average promised benefit and this is now under threat with the rising tide of corporate insolvencies. Furthermore, rather than increase the levy on corporations, it has the power to refuse to increase compensation payments in line with inflation.

The PPF has already rescued more than 66 schemes since it was set up in 2005. According to John Ralfe, an independent consultant, the 100-year-old high street chain, Woolworths, which recently collapsed, has a pension deficit of £250 million. This could mean that the PPF has to inject at least £100 million into the Woolworths’ pension pot, one of the largest payouts in its three years of existence. Ralfe has estimated that Woolworths’ workers face a cut in their pensions of 20 percent.

Woolworths reported a cumulative pension deficit of £81 million on an accounting basis in August, but is privately conceding that this figure is an underestimate. While this was initially estimated at £100 million, Ralfe believes the true deficit could be as much as £250 million. This is because the pension fund had liabilities of £384 million and assets of only £317 million last February, and these will have fallen considerably as 67 percent were held in shares.

Paul McGlone, an actuary at Aon, explained, “The PPF collects a levy of £675 million a year to fund itself, which means that it only takes another seven Woolworths to eat up those funds”.

The Financial Times revealed that Lehman Brothers, which collapsed in September with a widely reported £100 million pension fund deficit, contributed as little as £100,000 a year to the PPF because it had the highest possible credit score with credit ratings agency Dun & Bradstreet. Some advisors in the industry believe that the cost to the PPF could be as low as £10 million, in which case it is the work force who will bear the loss.

The PPF has refused to increase the levy more than inflation to protect workers’ pensions, despite the increased risk of corporate pension collapses. It announced that the levy for 2009-10 would be £700 million, instead of the maximum £863 million permitted. The government has rejected calls to guarantee the PPF.

More than 18 million workers have no occupational pension. Of these, some seven million have some form of personal pension plan whose funds are invested in the stock market. The commissions charged by the insurance companies always ate up most of the gains, but now these pension plans are almost worthless as a result of the downturn in the markets.

Fully 41 percent, or 11 million workers, have no pension plan at all because their wages are too low to allow them to save.

For years, working people have been told that their home will provide them with a nest egg for the future. Seven million homeowners, one quarter of the total, intend to use the equity in their property to pay for their retirement. The downturn in the property market has already wiped 18 percent of the value of their homes, and this is set to continue for the foreseeable future. They will be unable to sell their homes without incurring a loss, if they can sell them at all.

Many people who bought their homes late in their working life are stuck in debt with a never-ending mortgage. More than two million pensioners have mortgage debt of more than £100,000. The average mortgage debt of pensioners is about £50,000. One debt organisation reported that amongst those seeking advice, the over 60s had bigger liabilities than any other age group. When pensioners become ill, half will need to sell their home to pay for nursing home care.

According to Charlotte Black, Corporate Affairs Director of Brewin Dolphin, the view of property as a gilt edged investment is false: equities gained 470 percent over the last two decades whereas property gained only 270 percent, as of mid October.

The Economist reported that for American and European savers with personal pension plans, it has been a lost decade. Markets have gone through two booms and two busts and bonds and bank deposits have yielded little in the way of interest. Were it not for tax relief they receive, savers in pension plans would have been better off keeping their money under their mattresses.

Pensioners are facing further cuts in their living standards as the income from their meagre savings fall. The Bank of England cut lending rates to 3.5 percent last month and then to 2 percent week. As a result savings rates were slashed, while inflation is running at 4.5 percent a year. By way of contrast, lending rates fell only slightly as banks sought to shore up their profits. Saga, which specialises in savings plans for the elderly, said it would replace its one year fixed rate bond paying 5.75 percent with a one worth 4.75 percent.

Retirees have also seen the value of their pension pot fall as a result of the stock market crash. Annuity rates, which give income for life, are pegged to bonds linked to interest rates—bonds that have fallen to their lowest level in 30 years.

According to research from Lincoln Financial Group, 41 percent of workers in the UK doubt whether they will have enough to live on once they reach pensionable age. More than a third of people expect to work full or part time during their retirement to avoid poverty. Older workers are even more worried. Of those aged 55 or more, one in 10 already plan to work full time during retirement and 47 percent say they will work part time. Some doubt whether they will ever be able to retire.

More than 1.2 million men and women over retirement age are already working today.

Sections of the media are presently engaged in a sustained campaign to denounce the occupational pensions provided for civil servants, health workers, teachers, local authority workers and the police as unaffordable. Estimated by the Treasury at about £650 billion, payable over 50 years, public sector pensions are similar to the average private sector final salary scheme. There are numerous calls for the retirement age for existing members to be increased, ending final salary schemes in favour of average salary schemes to reduce the value of pensions from 21 percent of salary to just 7 percent, and for public sector pensions to be “properly funded”—meaning invested in the stock market.

Millions of people who have been forced by successive governments to rely on the market not the state to provide their pensions will now find themselves dependent upon the meagre state pension they had sought to augment. As it is, more than a third of pensioners live in poverty.

December 28, 2008

Swine Flu and Other Pandemics

Doctors Aid Group Lists Top 10 Humanitarian Crises

December 22, 2008

Reuters - Doctors Without Borders issued a top 10 list of humanitarian crises on Monday that included Congo, Somalia, Iraq and Sudan as well as what it called "neglected medical emergencies" in Myanmar and Zimbabwe. The international medical aid group said its list underscored the difficulties in bringing assistance to people affected by violence, especially highly politicized conflicts such as those in Pakistan, Iraq, Sudan and Somalia.

The eighth country on the list was Ethiopia, where Doctors Without Borders, known by its French acronym MSF, said violence and harsh climactic conditions made living a struggle for people in the Somali region of the country. The other two crises on the list were not in particular countries, but rather cross-border problems.
"The lack of global attention to the growing prevalence of HIV-tuberculosis co-infection and the critical need for increased global efforts to prevent and treat childhood malnutrition, the underlying cause of death for up to five million children per year, are also included," MSF said in a statement about the list, which was not in order of gravity.
The group said its medical teams witnessed firsthand the consequences of violence, displacement and neglected yet treatable diseases and health needs around the world.
"Many of the countries on this year's list illustrate the ever-shrinking space for impartial humanitarian action, making it extremely difficult to deliver aid to those most affected and vulnerable," said MSF International Council President Christophe Fournier.
He said MSF had been forced to curtail its work in Somalia because of direct attacks, and aid workers helping hundreds of thousands of people displaced by air attacks in northwest Pakistan had taken similar steps after threats and attacks.

In Myanmar and Zimbabwe, MSF blamed the governments for failing to provide adequate health care or assist aid workers.
"In Myanmar, where MSF is the main provider of HIV care, hundreds of thousands of people are needlessly dying due to a severe lack of HIV/AIDS treatment while the government does far too little to help its own people," the statement said.
Zimbabwe is battling one of the worst cholera epidemics in its history at a time of political paralysis that Western countries blame on President Robert Mugabe.

December 25, 2008

Timeline of the Great Depression

1920 (Decade)

During World War I, federal spending grows three times larger than tax collections. When the government cuts back spending to balance the budget in 1920, a severe recession results. However, the war economy invested heavily in the manufacturing sector, and the next decade will see an explosion of productivity... although only for certain sectors of the economy.
  • An average of 600 banks fail each year.
  • Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million in 1929.
  • Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies; by 1929, only 200 corporations will control over half of all American industry.
  • By the end of the decade, the bottom 80 percent of all income-earners will be removed from the tax rolls completely. Taxes on the rich will fall throughout the decade.

  • By 1929, the richest 1 percent will own 40 percent of the nation's wealth. The bottom 93 percent will have experienced a 4 percent drop in real disposable per-capita income between 1923 and 1929.
  • Individual worker productivity rises an astonishing 43 percent from 1919 to 1929. But the rewards are being funneled to the top: the number of people reporting half-million dollar incomes grows from 156 to 1,489 between 1920 and 1929, a phenomenal rise compared to other decades. But that is still less than 1 percent of all income-earners.
1922
  • The conservative Supreme Court strikes down federal child labor legislation.
1923
  • President Warren Harding dies in office. Calvin Coolidge, becomes president. Coolidge is no less committed to laissez-faire and a non-interventionist government.

  • Supreme Court nullifies minimum wage for women in District of Columbia.
1924
  • The stock market begins its spectacular rise. Bears little relation to the rest of the economy.
1925
  • The top tax rate is lowered to 25 percent - the lowest top rate in the eight decades since World War I.
1928
  • Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. The boom is largely artificial.
1929
  • Herbert Hoover becomes President.
  • Annual per-capita income is $750. More than half of all Americans are living below a minimum subsistence level.
  • Backlog of business inventories grows three times larger than the year before.
  • Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent.
  • Stock market crash begins October 24. Investors call October 29 Black Tuesday. Losses for the month will total $16 billion, an astronomical sum in those days.
1930
  • By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: 'Liquidate labor, liquidate real estate... values will be adjusted, and enterprising people will pick up the wreck from less-competent people'.
  • The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen. Even this is compensated for by the fact that American businesses are no longer investing in Europe, but keeping their money stateside. The consensus of modern economists is that the tariff made only a minor contribution to the Great Depression in the U.S., but a major one in Europe.
  • Supreme Court rules that the monopoly U.S. Steel does not violate anti-trust laws as long as competition exists, no matter how negligible.
  • The GNP falls 9.4 percent from the year before. The unemployment rate climbs from 3.2 to 8.7 percent.
1931
  • No major legislation is passed addressing the Depression.
  • The GNP falls another 8.5 percent; unemployment rises to 15.9 percent.
1932
  • This and the next year are the worst years of the Great Depression. For 1932, GNP falls a record 13.4 percent; unemployment rises to 23.6 percent.
  • Industrial stocks have lost 80 percent of their value since 1930.
  • 10,000 banks have failed since 1929, or 40 percent of the 1929 total.
  • GNP has also fallen 31 percent since 1929.
  • Over 13 million Americans have lost their jobs since 1929.
  • International trade has fallen by two-thirds since 1929.
  • Congress passes the Federal Home Loan Bank Act and the Glass-Steagall Act of 1932.
  • Top tax rate is raised from 25 to 63 percent.
  • Popular opinion considers Hoover's measures too little too late. Franklin Roosevelt easily defeats Hoover in the fall election. Democrats win control of Congress.
1933
  • Roosevelt inaugurated; begins 'First 100 Days'; of intensive legislative activity.
  • A third banking panic occurs in March. Roosevelt declares a Bank Holiday; closes financial institutions to stop a run on banks.
  • Alarmed by Roosevelt's plan to redistribute wealth from the rich to the poor, a group of millionaire businessmen, led by the Du Pont and J.P. Morgan empires, plans to overthrow Roosevelt with a military coup and install a fascist government modelled after Mussolini's regime in Italy. The businessmen try to recruit General Smedley Butler, promising him an army of 500,000, unlimited financial backing and generous media spin control. The plot is foiled when Butler reports it to Congress.
  • Congress authorizes creation of the Agricultural Adjustment Administration, the Civilian Conservation Corps, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Emergency Relief Administration, the National Recovery Administration, the Public Works Administration and the Tennessee Valley Authority.
  • Congress passes the Emergency Banking Bill, the Glass-Steagall Act of 1933, the Farm Credit Act, the National Industrial Recovery Act and the Truth-in-Securities Act.

  • Roosevelt does much to redistribute wealth from the rich to the poor, but is concerned with a balanced budget. He later rejects Keynes' advice to begin heavy deficit spending.
  • The free fall of the GNP is significantly slowed; it dips only 2.1 percent this year. Unemployment rises slightly, to 24.9 percent.
1934
  • Congress authorizes creation of the Federal Communications Commission, the National Mediation Board and the Securities and Exchange Commission.
  • The economy turns around: GNP rises 7.7 percent, and unemployment falls to 21.7 percent. A long road to recovery begins.
  • Sweden becomes the first nation to recover fully from the Great Depression. It has followed a policy of Keynesian deficit spending.
1935
  • The Supreme Court declares the National Recovery Administration to be unconstitutional.
  • Congress authorizes creation of the Works Progress Administration, the National Labor Relations Board and the Rural Electrification Administration.
  • Congress passes the Banking Act of 1935, the Emergency Relief Appropriation Act, the National Labor Relations Act, and the Social Security Act.
  • Economic recovery continues: the GNP grows another 8.1 percent, and unemployment falls to 20.1 percent.
1936
  • Top tax rate raised to 79 percent.
  • Economic recovery continues: GNP grows a record 14.1 percent; unemployment falls to 16.9 percent.
1937
  • The Supreme Court declares the National Labor Relations Board to be unconstitutional.
  • Roosevelt seeks to enlarge and therefore liberalize the Supreme Court. This attempt not only fails, but outrages the public.

  • Economists attribute economic growth so far to heavy government spending that is somewhat deficit. Roosevelt, however, fears an unbalanced budget and cuts spending for 1937. That summer, the nation plunges into another recession. Despite this, the yearly GNP rises 5.0 percent, and unemployment falls to 14.3 percent.
1938
  • No major New Deal legislation is passed after this date, due to Roosevelt's weakened political power.
  • The year-long recession makes itself felt: the GNP falls 4.5 percent, and unemployment rises to 19.0 percent.
1939
  • The United States will begin emerging from the Depression as it borrows and spends $1 billion to build its armed forces. From 1939 to 1941, when the Japanese attack Pearl Harbor, U.S. manufacturing will have shot up a phenomenal 50 percent!
  • The Depression is ending worldwide as nations prepare for the coming hostilities.
      Roosevelt began relatively modest deficit spending that arrested the slide of the economy and resulted in some astonishing growth numbers. (Roosevelt's average growth of 5.2 percent during the Great Depression is even higher than Reagan's 3.7 percent growth during his so-called 'Seven Fat Years!') When 1936 saw a phenomenal record of 14 percent growth, Roosevelt eased back on the deficit spending, worried about balancing the budget. But this only caused the economy to slip back into a recession in 1938.
  • World War II starts with Hitler's invasion of Poland.
1945
  • Although the war is the largest tragedy in human history, the United States emerges as the world's only economic superpower. Deficit spending has resulted in a national debt 123 percent the size of the GDP. By contrast, in 1994, the $4.7 trillion national debt will be only 70 percent of the GDP!
  • The top tax rate is 91 percent. It will stay at least 88 percent until 1963, when it is lowered to 70 percent. During this time, America will experience the greatest economic boom it had ever known until that time.
The above timeline has been complied by Steve Kangas from the Resurgence Magazine.

See also cycle of past depressions.