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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 income. [...]
    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 [PDF--100 KB].
  • 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 pension.
  • 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 retirees. [...] 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 further.
  • 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 own.
  • Janet 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
Vault's IBM Business Consulting Services message board is a popular hangout for IBM BCS employees, including many employees acquired from PwC. Some of this week's posts follow.
  • "The 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:
    1. A sophisticated grasp of project delivery dynamics
    2. A service offering that has a natural value proposition for clients
    3. An organization that has solid and improving delivery capabilities
    4. 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.
    5. 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 door” syndromes.
    • Refusal to plan according to the cycles in the industry – the “rose colored glasses” syndrome
    • 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 man’s land”.
  • "The 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 character”. 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.
  • "I'll 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.
  • "Predictions 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.
  • "The envelope, please..." 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.
  • "Heard 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.
  • "Lenovo 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 Little" - 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...
  • "I'm 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.
  • "Interesting 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 -"Common 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 known.
  • "absolutely 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.
  • "Time 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 reward?
  • "Don't 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.
  • "The 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 fail…..or 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 Ships Out. 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 meeting, "others 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 combined. [...]
    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 for "damned 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 KB].)
  • 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. Specifically:
    • 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.

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