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Highlights—January 29, 2005
- Wall Street Journal: Ten
Ways Employers Benefit from Benefits Plans, by Ellen Schultz. (Editor's note: This article is a "must read.")
Excerpts: Employers love to complain about benefits plans -- ailing pensions, rising health-care
costs and burdensome retirees. But for all the bellyaching, there's another side to this story:
Employers have been among the biggest beneficiaries of benefits plans.
The plans are a source of income, as well as cash for various expenses, and they can be used
as alimony in downsizings and bargaining chips with unions. Even when the plans don't provide
big payoffs, they're often much cheaper than they look, thanks to tax deductions and subsidies.Of
course, some of these options can be risky if companies are too aggressive. In recent years,
many employers have been tempted to manage their benefits plans for short-term rewards at the
expense of long-term goals, leading to underfunded pensions, investigations by the Securities
and Exchange Commission and even a few lawsuits. [...]
1. Pension Piggy Banks: Although recent headlines make it sound as though
pension plans are an endangered species, roughly two-thirds of the companies in Standard & Poor's
500-stock index have them. And the assets in those plans can help employers cover some steep
costs. For one thing, employers can withdraw pension assets to pay the bills of benefit consultants,
administrators, lawyers and investment managers involved with the pension plan. For example,
in 2002, the latest figures available, International Business Machines Corp. paid consulting
firm Watson Wyatt Worldwide $13.7 million, primarily for administration of its pension plan;
the next highest fee associated with the plan was $7.9 million to J.P. Morgan Chase & Co.,
the plan's trustee. IBM also paid itself more than $5.9 million for human-resources administration
and investment management related to the pension. [...]
3. Low-Cost Retiree Health Coverage: About 66% of companies in the S&P
500 provide retirees with health benefits, which typically continue coverage until age 65,
when Medicare kicks in. After that, employers may provide a supplement to Medicare to pay some
of the costs of prescription drugs, which haven't been covered by the government program. These
benefits aren't as costly as many people think. In fact, when used to encourage early retirement
in a downsizing, the benefits don't raise a company's health-care costs at all. The
employer is simply continuing to pay to cover the employee who has retired; the actual cost
hasn't changed. And since the company is downsizing, the employee either won't be replaced
-- meaning no new health-care costs -- or he or she will be replaced by a less-expensive worker.
Meanwhile, employers can protect themselves from health-care inflation for the retirees. More
than half of companies establish annual limits on what they'll pay per retiree, and once the
limit is hit, all the additional costs are passed to the retirees. In fact, rising prices can
benefit employers because retirees who can't afford the rising premiums drop the coverage.
The employer can also then reduce the liability it has projected for the retiree, which boosts
6. Benefits Plans as Profit Centers: [...] Pension plans pumped billions
of dollars into earnings until the market slide. But even though many pensions lost money for
several years, pension income is still a significant contributor to earnings at many companies.
At the end of 2003, 45 corporations reported pension income, including BellSouth, whose $486
million in pension income accounted for 7.9% of operating income. IBM had $571 million in pension
income, which accounted for 5.1% of its operating income; General Electric Co. had $1 billion,
or about 5.3% of operating income, according to figures compiled by R.G. Associates Inc., an
institutional research group in Baltimore. If link is broken, view
Adobe Acrobat version
- Wall Street Journal: SBC
Switches Pensions of 55,000. Cash-Balance Plan Frozen; Move to Traditional System
Will Reduce Obligations. By Ellen Schultz. Excerpts: In a move that bucks the trend in corporate
pension plans and will reduce its pension obligations, SBC Communications Inc. has frozen its
cash-balance plan for 55,000 salaried managers and moved them back into a traditional pension
plan. [...] SBC, which converted its management pension plan to a cash-balance plan in 1997, said
it is moving back to a traditional pension because it wants to reward longer-service workers. "We
wanted to focus our pension resources more in favor of people who are long-service employees,
and provide less benefit for those who are not with us a long time," said company spokeswoman
Anne Vincent. [...] SBC's 100,000 or so union employees, who are covered by traditional pensions,
will be unaffected, as will management retirees. New hires will be covered by the new traditional
- Forbes: SBC
Brings Back Traditional Pension Plan. Excerpt: Many firms have moved away from providing
pension, in favor of 401(k) plans in recent years. At the same time, a number of large employers,
including SBC, flocked to adopt cash balance plans, similar in some ways to both traditional
pension and 401(k) plans, but with significant differences in how benefits are calculated. Some
of the largest cash balance arrangements have been the target of lawsuits by older employees
who claim the newer plans discriminate by depriving them of gains they anticipated under the
traditional pension plan. In a closely watched case, a federal judge ruled in 2003 that a cash
balance plan adopted by IBM Corp. unfairly penalized older employees. IBM announced last month
that it plans to exclude new workers from the contested plan and offer them only a 401(k) plan.
That has fueled debate about whether other companies might not follow suit.
- Wall Street Journal: Rules
Let Firms Get Subsidy For Retirees' Drug Cost. By Theo Francis and Ellen E. Schultz. Excerpts: The final rules for
the new Medicare prescription-drug benefit rectify one big concern of retiree advocates: that
employers might get more money from the government than they actually spend on retiree benefits.
But the rules from the Centers for Medicare and Medicaid Services, which are to be published
today, don't resolve their concern that employers will get reimbursed not just for what they
spend on prescriptions but for what retirees spend themselves -- even if employers shift more
of their own costs onto retirees. Under the drug bill, which takes effect next year, the government
will provide an employer up to $1,330 per retiree, tax-free, if the company maintains a retiree
prescription-drug benefit meeting certain conditions. The subsidy is designed to pick up 28%
of the cost of benefits between $250 and $5,000 per worker.
[...] But another central concern of critics remains: namely that the calculation for the subsidy payments
will be based on the expenditures of both employers and retirees. That means employers can receive substantial
government subsidies for their retiree health plans even if they raise the out-of-pocket costs to those
[...] CMS also rejected recommendations from retiree advocacy groups and unions that companies disclose
how they qualify for the subsidy. CMS said disclosure wasn't explicitly required under the law and might
discourage employers from sponsoring drug coverage altogether. The agency said it would study the matter
- Washington Post: U.S.
May Scrutinize IBM's China Deal. Some See Risk of Industrial Espionage. Excerpt: The Bush administration is considering launching
an extensive probe of whether the pending sale of International Business Machines Corp.'s personal
computer business to a Chinese company might pose national security problems, according to members
of a congressional oversight group. [...] Some of the fears involve the possibility that Chinese
computer experts could use an IBM facility in North Carolina to engage in industrial espionage,
according to Michael R. Wessel, a member of the U.S.-China Economic and Security Review Commission,
which was established by Congress to monitor Sino-American commercial relations. [...] IBM has "other
facilities" in North Carolina "that do R&D," said Wessel, who as a top aide
to former Rep. Richard A. Gephardt (D-Mo.) worked on the 1988 law expanding the CFIUS's role. "So
the issue is not just the making of the boxes; it's how the networks work. IBM has service contracts
throughout the government, and [knowledge about] how one networks these computers gives one not
only the opportunity to do reverse engineering, but greater opportunities to hack in."
- BuzzFlash: Is
Wal-Mart a Person? Thom Hartmann Tells Why It Is--Kind of--But Not Really.
- New York Times: 60
Companies Plan to Sponsor Health Coverage for Uninsured.
By Milt Freudenheim . Excerpts: In a novel attempt to extend health coverage to uninsured workers,
60 large employers are joining together to sponsor an array of low-cost health insurance options.
The program, to begin in the fall, will be offered for at least two years and is intended to
cover uninsured part-time and temporary workers, contractors, consultants and early retirees,
who typically are not eligible for employer health plans. The sponsors, which include General
Electric, I.B.M., McDonald's and Sears, Roebuck, will begin promoting the low-cost plans in April
and May to 3 million eligible workers, about 7 percent of the 45 million uninsured Americans.
They hope that several hundred thousand people will sign up at the start. The employers will
not subsidize the coverage, but their participation created a pool of potential participants
sufficiently large to justify lower insurance rates than individuals would have to pay on their
Krueger comments on the "benefits" of tort reform. Full excerpt: Don't forget the
health care group CEOs! It is instructive to note that in the state of
Minnesota in 2003 (where there has been enough tort
reform to ensure that frivolous malpractice suits
cannot be filed) the total sum of all settlements from
medical malpractice lawsuits was $22 million, while
the salary and benefits to -one- CEO (of United
Healthcare) was $26 million.
|Vault Message Board Posts
Partner Dilemma, Pt 1", by "Dose of Reality". Full excerpt: We can always
count on you to ask the perfect question to keep the dialogue and analysis moving forward.
Have you considered a career in consulting? It is always a risk to make blanket statements
like the two of mine you referenced above, but unfortunately in this forum (small f),
definitive punch lines sometimes have to substitute for expository paragraphs to fit
the space requirements. Such is the case with my unflattering characterization of the
world of corporate sales, which was meant as a qualification of the first list of key qualifications
ascribed to general corporate jobs.
However, as you point out, it does shine the light on an interesting
and age-old APPARENT dichotomy between the CSF’s of consulting and the CSF’s of
being a sales-focused partner. In a perfect world, a consulting partner has the following
skills and capabilities at his disposal:
- A sophisticated grasp of project delivery dynamics
- A service offering that has a natural value proposition for clients
- An organization that has solid and improving delivery capabilities
- A strategic mindset and forward looking focus that will ensure that his pipeline of service
offerings is always matched to the market demands and firm capabilities – i.e. an
ability to maintain the quality of 2 and 3.
- Reasonable sales targets.
As long as all of these are present, then there is no need for the “unscrupulous
pathological liar” qualities. The problem is that there are a number of factors in this
industry that have made the above situation very much the exception including:
- Consulting service offerings that were basically a series of “flash in the pans”,
and partners that rode the wave to the partner rank – the “step in $1+” syndrome,
or “look what I found” syndrome
- Above had such narrow skill sets that they couldn’t ride the next wave, let alone
help to create it – the “one trick pony syndrome”
- Many partners that have ridden the project management prowess of others for their entire
careers, and whose approach to managing through adversity consists of finding someone
else to blame – the “Cyrano de Bergerac ” and the “Buck stops next
- Refusal to plan according to the cycles in the industry – the “rose colored
- Stubborn, suicidal clinging to the inflated partner compensation of the past, which resulted
in rank and file compensation policies that destroyed the previous equilibrium
and pushed the best people out the door. – the “kill the golden goose” and “it’s
all about me” syndromes.
- The heavy infiltration of business-ignorant technologists into management consulting – the “business
economics for dummies” or "how do you expect me to deliver without a spec" syndrome.
- The introduction of quarterly earnings obsession – the “in the long run we
are all dead” syndrome.
The firms that directly or indirectly embraced the above phenomena
are the ones that are struggling the most in this market. As far as where BCS fits
in, I would say that we are one of the most egregious examples due to 1) the economic overhang
of the acquisition, 2) hyper-political culture, 3) cadres of self-serving manipulative partners
from both legacy firms set up in an “everybody’s a loser” internal competition
4) obsession with earnings and natural challenges to achieving them given the strategic weaknesses
in the rest of IBM 5) weak-kneed leadership.
There is the potential for us to move down market into perform services
functions, but that would require an inversion of our top-heavy pyramid to balance
out the economics. Absent that kind of holistic change, we are stuck in strategic “no
Partner Dilemma Pt 2" by "Dose of Reality". Full excerpt: As far as your
other three dimensions:
- “past vs. current vs. future” - I believe that smaller specialty boutiques are
the only firms capable of reverting back to the old model.
- client vs. consultancy success – With all the mouths to feed, there isn’t enough
economic value on the table for both of us to prosper, and when push comes to shove
we will continue to oversell and under deliver to make the numbers work.
- individual vs. organizational success – Individuals in the organization are always
a distant third behind the company and the clients. Large firms have enough critical
mass and inscrutability to leave them there. It’s the old “tragedy of the commons” phenomenon.
In case you aren’t familiar with the expression, that is where in the 18th and 19th
centuries the old commons areas were open for anyone’s cattle to graze on. Since it
was free, replenishment/quality wasn’t a concern of users, so there was a constant race
to see who could exploit it the fastest before they moved on. Substitute consultants
for grass and company for cattle owners. The latter are perfectly happy to trash the
former, since in the short term they gain more than they lose, and no one ever takes them
to task for wiping out the productive asset, and in the modern case, no one is willing or
able to connect the exploitation to the inevitable organization-destroying consequence.
So in my perfect world the critical skills needed for everyone in the
consulting organization, from entry level up to managing partner are indeed “an inquisitive
analytical mind, a natural interest in one of our service lines, and an unassailable
With the proper backdrop, the sales process is simply an administrative accommodation,
instead of a deceptive, gutter-bound, dirty street fight, laced with internally inconsistent
assumptions, inflated capabilities assertions, and unachievable targets. For the latter, there
is nothing like an “unscrupulous pathological liar”, to stave off the corporate
grim reaper. Walk the halls at Armonk if you want to see them in action.
answer my own question" by "CONsulting_2_long". Full excerpt: Dose,
I only ask questions when I want to get on the soap box. But thank you for the compliment.
I sought a follow up from you because I thought you comments were stereotypical, i.e.,
vague accurate at some macro level. Further, I agree on your follow up points regarding
the enablers of a thriving consultancy. But I disagree with some of your other conclusions
especially in regards to large multi-billion dollar consulting organizations.
I believe that the generalist consulting partner is an obsolete skill
set, (especially at mid-tier, large IT orientated consultancies), much as the family
practitioner has been replaced with legions of specialists in the medical field. They
may exist, but their place in the industry is reduced and compensation is reduced as well.
Why do I say that?
- Large consultancies have numerous 'partner' level people. Many have either delivery OR sales
skills. Delivery skills are specialized to the point that most individuals cannot
easily reinvent themselves. Certainly a few can/could, but not the masses of those
presently on role.
- Clients are looking at mid-tier, large firms like IBM as do-ers not advisors. In the end,
only specialists can thrive ("I'm the best ERP of the month specialists") This
trend has evolved and I don't see it reversing.
- IBM will eventually complete its self-commoditizing of service to the point that few delivery
execs are needed and even fewer sales partners will be needed. If IBM can sell hardware
with band 8s, why not standardized service? BCS is a complete aberration of the typical
IBM leverage model.
In the end, I see must lower skills and compensation to be chasing and
delivering a lower margined service. The segmenting of the skills into two different
bodies is the first step before the ultimate end-game of lowering the level. A bit provocative,
I'm sure. All comments wanted because everyone knows that I've been CONsulting _2_long.
of leadership changes" by "scoopdiva". Full excerpt: Dose
and other BCS sages...
OK so we are in year 3...still not performing to "expectations". GR,MC and
others still at the helm. Would love to know your opinions on whether we will see a change
in BCS leadership this year. And if you dare..."initial" speculations on who
would be logical replacements.
by "deep_eye". Full excerpt: usually organizations in these situations initiate major cost
containment strategies and that has been the approach du jour since the PwCC acquisition. These steps
usually entail miserably small raises, no bonuses, justification for expenditures down to the $25 level
- pretty much everything you've read on this board to date. For what it's worth, I do not believe GR
and/or MC will be leaving in the immediate future, despite their pernicious managerial and leadership
performance. Most likely, heads will roll below them, some will be reassigned, etc., but certainly not
the purge that is well earned and long overdue. Organizations are notoriously difficult to pin down as
to when the clock starts to run out re improving performance after a merger or acquisition.
a rumor that..." by "CONsulting_2_long". Full excerpt: I heard a rumor
from a reliable source that GR has been put on the 'plan'. My source gave no timetable
for judgment day/quarter, but said that Armonk is clearly dissatisfied with what BCS is
doing with the proceeds from the sale of Storage. (For the uninitiated, IBM sold off a
the Storage division for not hitting profit numbers. The proceeds roughly equaled what
was needed to purchase PwCC). My source did not disclose whether failure to meet plan would
necessitate resignation or the more typical "penalty box" executive shuffle.
Hang on and hope for the best.
and FUMU" by "ancientblueconsultant". Full excerpt: I won't
comment on the plastic blonde's future or that of any of her cohorts. Just knowing their
fates are in the hands of Johnny "Roadkill" Joyce is good enough for me. Frankly,
the "Tammy Bakker facial look alike winner" wouldn't be the first off the wagon.
I would think there's maybe someone who should "Zeeee" away first with "Family
Dollar" buddy and join "E-Rate" heaven! The big story is the "Chicken
Sammy problem surrounding spies, disgruntled terrorist-happy Republicans (IBM was always
known to be a democratic leaning company until Sam put a red facade to the blue pig)
and Lenovo. That could make Charleston, SC history again by starting the second war of
executive secession! No chance to FUMU for the golden boy. The ceiling points to the
left or right from here boy...
No Nostradamus" by "Dose of reality". Full excerpt: Unfortunately,
I'm an analyst with a strategic orientation, not a soothsayer. Discerning major management
decisions at IBM defies logical analysis or business rationale, so I am woefully unequipped
to make a confident prediction. Whether GR or MC are in the mix on a go forward basis is
much less of a factor than the choice of their replacement, the charter they are given,
and the amount of latitude they have to make the hard decisions. The odds of an imminent
organizational change are higher than the odds of a real management change. On the former,
three years is probably enough time to compel a conspicuous re-arranging of the deck
chairs to present the appearance of action. For a real management change to be commissioned
would require a real disaster in the numbers, and would almost have to be accompanied
by similar changes at the IBM level. Turning BCS into the kind of employee-motivating,
opportunity-filled company needed to capitalize on our market opportunities can’t
be done in isolation.
As far as likely candidates, if given absolute power and authority,
and two years dispensation on earnings trajectory, I would be happy to volunteer for
the job. I could guarantee that the effective embedded market cap and cumulative earnings
for BCS in five years would be double what they would be on our current trajectory. Of
course I would have to hire an Ari Fleischer type PR guy to deal with internal and external
communications – IBM
is years away from being able to accept candid evaluation and a people-oriented management
philosophy. Those have always been my fatal “flaws” in
the corporate world. Hey – maybe GR and MC would be willing to stay on – they
have been playing the talking head, hand-puppet part for years. So much for wild fantasies – let
me stop now before I bring Angelina Jolie and Halle Berry into the mix.
- "Huh??" by "Dose
of reality". Full excerpt: Why would you want to find
a "similar position" with shoddy project management and understaffed projects?
The good news is if that is what you are looking for, you have come to the right place,
and here you will also have the opportunity for a stagnating salary, no opportunity for
bonus, working on projects that have nothing to do with your career goals and are a three
hour plane ride away. Just apply through any of the open market channels, and avoid letting
them know why you are leaving the other firm. BCS recruiters love applicants that thrive
on shoddy project management, understaffing, stagnating salary, no opportunity for bonus,
working on projects that have nothing to do with your career goals and are a three hour
plane ride away. If you really want to seal the deal, let them know that you don't mind
forfeiting your vacation time and having no opportunity for training if it means being
able to make your 92% utilization target. That's the surest ticket into BCS.
Language - Wouldn't you Say?" by "Dose of
reality". Full excerpt: "As many as 10 - 20% might be (a) 1..." How about
that - three qualifiers in a six word phrase - As many, 10 - 20, might. Some up and coming
HR wonk probably worked overtime on coming up with that language. That's right up there
with the four out of five dentists, all-natural, 99 and 44/100% pure, teflon coated wheel
bearings, and any of the recent prescription drug spots on the "misleading advertising
scale". The only thing that is missing from the last one is the equivalent warning
on side effects and dangers to your health that speed by at the end of the commercial
side effects include nausea, upset stomach, diarrhea, cramps, brain damage, headaches.
In most cases these side effects are mild, but have been known to cause death in a
few rare cases..." No need to repeat the equivalent PBC warnings - they are well
correct" by "canttakeit". Full excerpt:
On top of that - the PDF assessments are just starting now - post the PBC ratings. So,
they already know who will be promoted. This makes the entire assessment process by SMEs
a joke. If I deny someone a PDF advancement and they are on the promotion list and already
received a 1 rating - what do you think will happen...recommendation will be vetoed and
the guy will get advanced anyway. Here's a real world example - mine:
- Band 9
- Utilization 113% (PBC target 83%)
- Sales credit 2.5M (PBC target 750k)
- memo to file from client
- memo to file from partners
- proposal work
- assisted S&D efforts at client I had relationships with
- pre-sales workshop work
- 1's in all dimensions on all PAs
PBC rating = 2+ (reason being I'm not on the promotion list). I told
my partner IBM is obviously sending out a clear message. I received the typical BS reply
- we will work with you to ensure you get all the right boxes ticked for '05 and see
what it takes to get you promoted. I calmed down a bit when I realized that the difference in
bonus due me had I received a 1 wouldn't pay for the an email stamp.
to go, my friend, time to go..." by "deep_eye". Full excerpt: I got the exact
same bullshit message last year - they all must be reading from the same script. All you
can be sure of, if you are still around at the end of '05 is, you will be just as exhausted
and just as unrewarded. The value-add to them? Another year of you at 113% and your overperformance.
If I can motivate, cajole, threaten, induce people to incredible levels of performance with
no obvious tangible reward year after year, what would ever induce me to finally give them that
Calm Down!" by "Dose of reality". Full excerpt: You are falling right
into the trap. Your benchmark comparison shouldn't be what would have happened if you had
gotten a "1" at IBM, it should be what you would have received had you demonstrated
the same performance at a firm that really appreciated its employees. With that kind of
performance, you should get a 6-8% raise and a 12 - 15% bonus! IBM relies on you continuing
to chase an unattainable carrot, and assuming that this is the only dog track in town.
And oh by the way, the carrot is a hologram. If everybody just spent a half hour documenting
what you have contributed and sacrificed the past three years, what you got in return and
what you expect to get over the next three years, enlarge to poster size, and hang on your
refrigerator at home, you will develop the appropriate career management mindset. My goal
is to turn myself into the BCS version of the Maytag repairman, but I need your help.
Bonus Pool" by "Dose of reality". Full excerpt: Everyone is assured
of getting a bonus this year. There is a collection box in GR's office, and word on the
street is that it is absolutely overflowing with pennies and nickels. With the sky high
morale and incredible company spirit in BCS, people are lining up to contribute to the
bonus pool. Everyone knows how important it is to keep each other motivated and happy.
I happened to see MC actually stuff a $5 bill in the box the other day. Now if you want
to get your fair share of the pot, you have to convince all the superiors in your practice
that you are particularly miserable, have an active job search going, and your departure
is imminent. That is the true path to increased compensation – forget
about performance, productivity and sales. Only a well-communicated resignation threat
will get anyone’s attention.
Now make sure that you can’t be replaced by someone with a decade
less experience, 20 less IQ points and no business skills, otherwise this strategy will
succeed depending on your real goals. Of course, that replacement possibility applies
to most of the staff below band D, given our sophisticated staff skill/comp benchmarking system
which totally ignores talent, actual experience, and ability, and presumes that recently minted
Indian MS’s can step right in and replace a 10 year, 10 project veteran with an MBA, and
deep functional knowledge. But seriously, whatever bonus pool is freed up will only be used
defensively for project/client critical resources, those that will be put in that category
will be very rare, and it is merely a stop-gap measure.
|Coverage on H1-B and L1 Visa and Off-Shoring Issues
- WashTech: Adding
Fuel to the H-1B Fire. Permanent Residency Raises Questions. Excerpts: When Texas Instruments
employee Joseph Valley walked into the company’s law offices and asked for the job
descriptions for new H-1B visa positions, they told him he was the first employee to request
to see them. Not long after, he was fired. In August of 2003, Valley was given a scathing,
out-of-the-ordinary performance review and terminated for "using TI strictly private
information inappropriately,” he says. Valley, who worked for Texas Instruments for
10 years, believes that with the company’s
increased use of foreign immigrant workers at its Dallas headquarters is making it hard
for American workers to find work. He points to periods over the last four years when
the company offered early retirement plans or announced reduction-in-force measures, and
then filed applications to hire hundreds of foreign H-1B visa workers, as evidence that
Texas Instruments has made little effort to recruit American workers.
Microsoft, Intel, IBM and Oracle are among the top 10 companies requesting
permanent residency for H-1B workers, according to the Department of Labor. In 2004,
Microsoft requested permanent status for 1,203 workers; 529 of the applications were
certified. The software company led applicants in both categories. [...] Hundreds of
permanent residencies are granted each year and tens of thousands of H-1B visas …quot;
the current cap is set at 65,000, plus an exemption for 20,000 graduate students …quot;
are allotted annually, there has been a steady siphoning off of job opportunities for
U.S. workers. The University of Illinois at Chicago’s Center for Urban Economic Development
found that over 17,000 high-tech jobs were lost in the Dallas area during a three-year period
ending in 2004, detailed in the study America’s High Tech Bust. Likewise, the Institute
of Electrical and Electronics Engineers (IEEE) recently testified at a U.S.-China Commission
on Trade that their members are experiencing the first decline in job placement and
salary in 31 years due to global “inshoring” instead of offshoring.
- CIO.com: Innovation
U.S. computer makers such as Dell, Motorola and HP are outsourcing not just the manufacture
but the design of new products to offshore companies. Could this be the end of America's
innovative edge in electronics? Excerpts: Buy a laptop anywhere in the world and there
is a one-in-four chance that T.J. Fang will process the order. You'll just never know
it. Fang's secret is cloaked in IT, in servers that consolidate purchase orders from
name-brand American companies such as Dell, Hewlett-Packard, Apple and IBM. The order
trail leads to Fang's ERP system at Quanta Computer in Taipei. Fang, assistant vice president
and head of IT operations at Quanta, feeds those orders to his Taiwanese and Chinese
suppliers and factories, and within five days, Quanta "drop
ships" to the customer a laptop that the buyer himself configured on the brand-name website.
No one at the company selling the laptop ever lays a finger on it. Indeed, investment
bank Morgan Stanley estimates that the manufacturing for 89 percent of American brand-name
laptops are outsourced today. What's more, many of these famous computer brand names
don't even design their machines anymore. New models are chosen from a shelf of fully
functioning prototypes offered up by a handful of Taiwanese companies. Quanta's ability
to design and build new laptops from scratch has helped it gain a 25 percent share of all laptops
sold in the United States. "In
the past 10 years, [companies such as Quanta] have gone from undercover stealth to a
massive global business," says
Adam Pick, senior analyst for iSuppli, a market intelligence consultancy. [...]
The trend is eerily similar to the offshore outsourcing of computer
programming. Unemployment rates among both R&D engineers and IT programmers in the United
States continue to trend downward, despite the recent economic rebound. As more valuable components
of the manufacturing value chain progressively move offshore, will the ultimate value creators—advanced
research and innovation—eventually move offshore too? How long can U.S. companies continue
to innovate when they no longer manufacture or update products? What will be left behind? Marketing?
|Coverage on Social Security Privatization
- New York Times: Senators
Urge Bush to Sell Overhaul of Social Security. Excerpt: After a meeting
with President Bush on Tuesday, Republican senators said they had cautioned him that
the drive to change the Social Security system was faltering because the public was not
convinced that a fundamental overhaul was necessary. The senators said Mr. Bush responded
by promising to make a strong case in his State of the Union Message on Feb. 2 and to
lead the charge to win public support. "From our perspective on the Hill," said Senator
Gordon H. Smith of Oregon, giving his version of what the president was told at the White House
are defining the debate, and if he lets them do that, he loses the debate." Mr. Bush has
the bully pulpit, Mr. Smith said, and he should use it "to
calm the seniors and win the youth."
- New York Times: Chile's
Retirees Find Shortfall in Private Plan. Excerpts:
Nearly 25 years ago, Chile embarked on a sweeping experiment that has since been emulated,
in one way or another, in a score of other countries. Rather than finance pensions through
a system to which workers, employers and the government all contributed, millions of
people began to pay 10 percent of their salaries to private investment accounts that
they controlled. Under the Chilean program - which President Bush has cited as a model for
his plans to overhaul Social Security - the promise was that such investments, by helping
to spur economic growth and generating higher returns, would deliver monthly pension benefits
larger than what the traditional system could offer.
But now that the first generation of workers to depend on the new system
is beginning to retire, Chileans are finding that it is falling far short of what was
originally advertised under the authoritarian government of Gen. Augusto Pinochet. For
all the program's success in economic terms, the government continues to direct billions of
dollars to a safety net for those whose contributions were not large enough to ensure even a
minimum pension approaching $140 a month. Many others - because they earned much of their income
in the underground economy, are self-employed, or work only seasonally - remain outside the
system altogether. Combined, those groups constitute roughly half the Chilean labor force. Only
half of workers are captured by the system.
Even many middle-class workers who contributed regularly are finding
that their private accounts - burdened with hidden fees that may have soaked up as much
as a third of their original investment - are failing to deliver as much in benefits
as they would have received if they had stayed in the old system. [...] Over all, Chile
has spent more than $66 billion on benefits since privatization was introduced. Despite initial
projections that the system would be self-sustaining by now, spending on pensions makes up more
than a quarter of the national budget, nearly as much as the spending on education and health
Among the complaints most often heard here is that contributors are
forced to pay exorbitant commissions to the pension funds. Exactly how much goes to such fees
is a subject of debate, but a recent World Bank study calculated that a quarter to a third of
all contributions paid by a person retiring in 2000 would have gone to pay such charges.
But most Chileans are unaware of how much they are paying to the funds because the lengthy
quarterly financial balance sheet they receive "is not comprehensible," according
to Guillermo Larraín, director of the Superintendency of Pension Funds, a government
agency. "It needs to be replaced by a simple and transparent financial statement," he
said, so workers can determine which fund charges the lowest fees. [...] For those
remaining in the government's original pay-as-you-go system, the maximum retirement benefit
is now about $1,250 a month. The National Center for Alternative Development Studies, a research
institute here, calculates that to get that same amount from a private pension fund, workers
would have to contribute more than $250,000 over their careers, a target that has been reached
by fewer than 500 of the private system's 7 million past and present contributors.
- Economic Policy Institute: Privatization
fix for Social Security is worse than doing nothing. Excerpt: Figure 1 uses this CBO
data to show the replacement rates for the median worker who retires at age 65 between
2045 and 2055 in the lowest, middle, and highest earnings quintiles. The figure shows three
replacement rates: those promised under current law; those that can actually be paid if
no changes are made to the current system (that is, using only a current year’s dedicated
Social Security revenues plus the Social Security Trust Fund); and those implied by the
Bush Administration’s plan, which includes both Social Security benefits and income
earned from private accounts. [...] As can clearly be seen, the Bush Administration’s
plan provides lower replacement rates for all workers relative both to benefits promised
in current law (the left bar) and those that could still be paid out even if no changes
were made to address the so-called “crisis” (the middle bar). This last comparison
is especially important, as privatization advocates’ alarmist rhetoric creates the
impression that Social Security is in “crisis,” and that failing to implement
radical changes to the system immediately will result in disaster for today’s young
workers. The middle bar showing replacement rates that can be funded out of the existing
structure of Social Security (current revenues plus the Trust Fund) presents what would
happen if absolutely nothing is done to shore up the actuarial shortfall facing Social
Security. In essence, these replacement rates represent the full extent of the alleged “crisis” that
the Bush Administration purports to address with its Plan 2. In other words, the “crisis” looks
a lot better than its proposed fix.
- The Social Security Network: Ten
Myths about Social Security. By
Greg Anrig Jr., The Century Foundation. Excerpts: Myth #1: Social Security is in crisis
and facing bankruptcy. [...] Myth #2: Social Security is unsustainable. [...] Myth #3:
Social Security's trust funds are filled with worthless IOUs. [...] Myth #4: The real date
to worry about is 2018. [...] Myth #5: Social Security is a bad deal. [...] Myth #6: Social
Security is overly generous. [...] Myth #7: "Privatization" will strengthen Social
Security. [...] Myth #8: Today's young workers will benefit the most under privatization.
[...] Myth #9: Privatization will enable retirees to leave the assets in their accounts
to their heirs. [...] Myth #10: Reforms that retain Social Security's existing protections
will not work.
- New York Times: Bush
Plan Poses Tough 'Safety Net' Questions.
By David E. Rosenbaum. Excerpts: If individual investment accounts become an integral part
of Social Security, as President Bush is proposing, what will happen to workers who become
disabled before they retire? Will they be allowed to draw on the savings in their retirement
accounts? Will their standard Social Security benefits be increased to make up for the
fact that because they have worked fewer years, their personal accounts are likely to
be smaller than those of retirees? If they do receive higher benefits, will they have
to forfeit their investment savings? These are among the dozens of questions posed in
a report issued on Wednesday by the National Academy of Social Insurance, a private,
nonpartisan organization of academics and government officials who specialize in issues
like Social Security, Medicare and unemployment compensation. [...]
Currently, 16 percent of those receiving monthly Social Security checks
are people under retirement age who cannot work because they are disabled. They receive
the same benefits, based on their earnings in their working years, that they would receive
if they were retired. This is a central element in the safety net provided by Social
Security. Social Security provides more than half the total income for about half of
these disabled people and more than 90 percent of the income for about one-fifth of them.
The premise behind almost all proposals to divert tax money into private accounts is
that ordinary Social Security benefits would be reduced to save the government money, but theoretically
retirees would be at least as well off because income from their private accounts would
make up for the lower benefits. But this would not work well for people who become disabled.
Their accounts would not provide as much income as those of retirees, since they would have
had fewer working years to put money into accounts.
- New York Times: Little
Black Lies, by Paul Krugman. Excerpt: Social
Security privatization really is like tax cuts, or the Iraq war: the administration keeps
on coming up with new rationales, but the plan remains the same. President Bush's claim
that we must privatize Social Security to avert an imminent crisis has evidently fallen
flat. So now he's playing the race card. This week, in a closed meeting with African-Americans,
Mr. Bush asserted that Social Security was a bad deal for their race, repeating his earlier
claim that "African-American males die sooner than other males do, which means the
system is inherently unfair to a certain group of people." In other words, blacks
don't live long enough to collect their fair share of benefits. This isn't a new argument;
privatizers have been making it for years. But the claim that blacks get a bad deal from
Social Security is false. And Mr. Bush's use of that false argument is doubly shameful,
because he's exploiting the tragedy of high black mortality for political gain instead
of treating it as a problem we should solve.
Let's start with the facts. Mr. Bush's argument goes back at least seven
years, to a report issued by the Heritage Foundation - a report so badly misleading that
the deputy chief actuary (now the chief actuary) of the Social Security Administration
wrote a memo pointing out "major errors in the methodology." That's actuary-speak
lies." In fact, the actuary said, "careful research reflecting actual work histories
for workers by race indicate that the nonwhite population actually enjoys the same or
better expected rates of return from Social Security" as whites. Here's why... (If link
is broken, view Adobe Acrobat version [PDF--31
- New York Times: Democrats
Bash Bush Social Security Plan. Excerpts:
Senate Democrats on Friday criticized President Bush's plan to add personal accounts
to Social Security and accused his administration of improperly using the Social Security
Administration to promote the idea. A pair of Social Security employees told the Democratic
Policy Committee they objected to internal agency documents that direct employees to
talk about the system's problems and a need for reform. "That is a political message,
and it's not my job as an agency employee to project a political message," said Debbie
Fredericksen, who works in the Minneapolis field office and is a union representative.
[...] "These messages serve no other purpose than to sear the idea of crisis into the public's mind,"
said Sen. Frank Lautenberg, D-N.J.
- The agency's communications plan directs workers to spread this message: "In order
for Social Security to be there for future generations, necessary reforms must take place."
- Talking points distributed internally reflect Bush's political messages about Social Security
and the need for personal accounts. It includes Bush's principles for overhauling
the system, including that "modernization must include individually controlled,
voluntary personal retirement accounts to augment Social Security."
- Mailings to Americans detailing the benefits they can expect to receive also warn that
"the Social Security system is facing serious financial problems, and action is needed
soon to make sure that the system is sound."
- The agency's Web site and customer service telephone lines push the need to "modernize
and reform" the system, saying the future shortfall is "massive and growing."
- Christian Science Monitor: Social
Security crisis? Not if wealthy pay their way. By Kevin Drum. Excerpt: Is Social Security
headed for a crisis sooner than thought? Although President Bush says so, not everyone agrees.
The system's trustees estimate the Social Security trust fund is in good shape for another four
decades. The nonpartisan Congressional Budget Office figures five decades. Many independent
economists think Social Security is healthy for more like six or seven decades. [...]
Unlike ordinary government functions, Social Security is funded by its
own tax, the payroll tax. In 1983, at a time when Social Security was genuinely facing
a crisis - it was mere months away from failing at the time - a commission appointed
by President Reagan and headed by Alan Greenspan proposed a series of fixes. Among other things,
the Greenspan commission recommended increasing payroll taxes. But there was a twist: Knowing
that the baby boomers would begin retiring around 2010, Mr. Greenspan recommended raising payroll
taxes by much more than was needed to pay benefits at the time. The surplus would be used to
buy Treasury bonds, which could be redeemed when the boomers retired and payroll taxes were
no longer sufficient to fully fund retirement benefits.
This is where the second twist comes in. Because the surplus payroll
taxes were handed over to the federal government (in return for Treasury bonds), this
meant ordinary income taxes could be kept low. After all, the federal government has
a fixed need for money, and if it gets excess money from payroll taxes it can afford to keep
income taxes lower than they'd otherwise be. But the payroll tax is a flat tax, paid disproportionately
by low and middle income workers. The income tax is a progressive tax and is paid disproportionately
by high earners.
So this was the implicit bargain in the reforms recommended by Greenspan
and signed into law by Reagan: From 1983 to 2018, low- and middle-income earners would
pay excess payroll taxes. This allowed income taxes to be kept low, and primarily benefited
high earners. Then, beginning in 2018, instead of raising payroll taxes to pay for baby-boomer
retirement benefits, Social Security would begin selling its bonds back to the government.
To pay for those bonds, income taxes would be raised - high earners would begin paying
higher income taxes. In other words, the fact that income taxes will eventually need
to be increased in order to cover Social Security benefits was part of the Greenspan/Reagan
plan from the start. That's the real meaning of the trust fund: It's an implicit promise
that high earners will keep their part of the bargain and begin paying their share of
Social Security's costs when the baby boomers retire.