The author, Glenn Coleman, even admits at one point "Wait a second, I'm thinking. I've heard this before. Lynch has said something like this in almost every interview I've read." But Coleman doesn't let that stop him from repeating it all again -- several times. And of course he dutifully offers the standard Lynch credential about his great track record (naturally, without mentioning that this track record was earned in the 1970s and 1980's when Lynch's fund consisted of only a few tens of millions of Johnson family money, and was closed to public participation).

Here are some of the insights offered by Lynch, followed by my comments -- the whole thing is pretty much like this. You'll see that there's nothing here that isn't strictly true... the problem is that it's all only strictly true -- and hence, pretty much devoid of useful meaning. But as Coleman puts it, "This is where Lynch tosses me -- and you -- a gold nugget..."

"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy."

• Right... that's what "wisely" means.

"...my system for over 30 years has been this: When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom."

• Right... that's what "attractive" means.

"People who have made money in the stock market usually bought companies that have done well over time."

• Right... that's what "well" means.

"That's what the 1990s teach us: If the companies do well, the stocks do well. ...That's been the history of America through 100 years, particularly in the past 50 years. That's the lesson."

• OK, got it. Really. That's what "well" means.

When the Enron scandal unfolded, it turned out that a lot of Enron employees had invested their 401(k)s in Enron stock -- which subsequently evaporated. And more broadly, as the bear market of the last three years has played out, many 401(k) investors have seen their account values decline for the first time -- in some cases quite severely. The paternalists whine that this is the inevitable tragedy that occurs anytime you let people manage their own lives. Oh, for the good old days when trustworthy companies managed pensions on behalf of their employees -- and shame on anyone who would suggest that people should manage their own private Social Security accounts!

I've always wondered why anyone who claims to be concerned with protecting employees would so urgently not want them managing their own pensions that they would prefer to have Enron do it for them. And the answer I always got was, "If Enron screws it up, the employee is always covered by the Pension Benefit Guaranty Corporation." That's the government agency that stands behind corporate pension funds, roughly in the same way the Federal Deposit Insurance Corporation stands behind bank accounts.

Now it turns out that there have been so many corporate bankruptcies in the last couple years that PBGC's $8 billion trust fund may not be enough to meet all the liabilities it's had to assume. That doesn't mean that PBGC doesn't have the cash to pay pension benefits -- it does, for many years to come. What it does mean is that PBGC is "underfunded" -- in other words, the value of its trust fund is less than the actuarial present value of its liabilities.

There are only two-and-a-half ways that the PBGC can get back up to full funding. The "half" way is to hope that interest rates go up, which will lower the present value of PBGC's liabilities (hopefully more than it will lower the value of PBGC's assets, all of which are in government-issued bonds). But if that doesn't bail out PBGC, they'll either have to increase the mandatory premiums that they charge companies with pension plans, or take money from general tax revenues.

So...connect the dots. It doesn't take a genius. Kill 401(k)s (for the employee's own protection, of course), and its a short step to full-out taxpayer funding of pension benefits. It's just Social Security, all over again. Don't they ever learn? Don't you?

Posted by Donald L. Luskin at 12:47 AM | link  

Sunday, January 26, 2003