Think the Corporate Scandals Haven’t Affected You? Think Again!
Corporate Wrongdoing Hurts Working Families and Retirees

Reports of huge financial losses and incomprehensible levels of corporate and personal greed at companies including Enron, Tyco, Adelphia, and WorldCom, coupled with questionable financial maneuvers by President Bush while a director of Harken Energy Corp. and by Vice President Cheney when he was CEO of Halliburton, are having a chilling effect on the country.

“These scandals and the Bush Administration’s delayed and often watered-down response are undermining consumer confidence, jeopardizing the economic recovery and destroying millions of workers’ retirement security,” says President John J. Flynn. The numbers are staggering. According to a report by Fortune Magazine (September 2, 2002), top executives at “America’s Losingest Companies” made roughly $66 billion by selling their stockholdings before their company’s stock value plummeted and the holdings of unsuspecting investors were virtually wiped out.

No One Has Been Spared

In a recent address to the Senate, Majority Leader Tom Daschle (D-SD) indicated that the still-unfolding scandals of corporate mismanagement and fraud would have a severe impact on hard-working American families. Already, shareholders, including pension funds through their investments in individual stocks, mutual funds, the S&P 500 index, and other funds, have lost billions of dollars due to the sharp drop in the stock market’s value. Since stock prices peaked a couple of years ago, the value of publicly traded stock has fallen by roughly $7 trillion (The Washington Post, July 23, 2002), and well over a trillion dollars has literally evaporated from workers’ retirement and savings funds. According to a USA Today/CNN/Gallup Poll, “nearly half of those saving for retirement, 46 percent, say they will have to postpone retiring because of the shrinking stock market.”

Individuals covered by traditional defined benefit plans, such as the International Pension Fund, which guarantees a certain level of income for life in retirement, are in much better shape than those workers whose primary source of retirement income is a 401(k) (defined contribution plan). This is because 401(k)s increase or decrease depending on the investment mix. Although traditional pension plans are not immune to the overall drop in stock values, participants have far greater protections. “But even traditional plans face challenges when the stock market takes the kind of hit it has in the last year or so,” says Flynn. In the short-term, traditional plans will have to be more conservative about plan improvements in order to ensure that plans remain properly funded. The International Pension Fund’s value has held up well during this period, according to the funds Executive Director David Stupar. “We’re pleased to report that when Enron went down, IPF didn’t hold one share of its stock.”

Privatization Down But Not Out

Plummeting stock market values have also had an impact on the on-going Social Security debate. Although many former supporters of privatization are changing their tune, the Administration is still pushing to privatize the Social Security System. That’s the bad news. The good news is more Americans are beginning to understand the downside of a privatized Social Security System — a system where an individual’s contributions are invested in a private account. In a Wall Street Journal/NBC poll conducted in July, 55 percent of Americans say they oppose partial privatization of Social Security. And a recent report by the non-partisan Center for Economic and Policy Research found “that if the President’s Commission plan which invested 2 percent of Social Security payroll taxes in the stock market was enacted in 1998, workers would have lost $31 billion in the stock market just through June of this year.”

While many of the Republican candidates up for election this November have become silent on this issue, efforts are still underway “behind the scenes” to privatize the Social Security System.

Construction Industry Feels the Impact

A loss of retirement savings isn’t the only hit felt by working families as a result of corporate scandals. Household net worth is at its lowest level in years, personal debt is up, banks have tightened lending standards making it harder for businesses to get loans, and state and local revenues are down.

The result — capital for new building projects is harder to come by, with funds for private and public construction projects tightening up, and unemployment is rising. The unemployment rate rose to 5.9 percent in July from 4.6 percent just one year earlier. The construction industry is feeling the effects. The unemployment rate in the construction industry rose from 7.1 percent in July 2001 to 10.3 percent in July 2002 — the highest level in more than five years.

Corporate Accounting Reform Legislation

In an effort to restore confidence in the scandal-tainted corporate world, U.S. lawmakers reached agreement on July 24, 2002, on the toughest new restrictions on accounting practices since the Great Depression. Much of the Senate bill, introduced by Senator Paul Sarbanes (D-MD) was preserved. The new legislation will create an independent oversight board of auditors, ultimately overseen by the Securities and Exchange Commission. Companies will no longer be permitted to hire the same accounting firm for auditing and for many consulting services. Corporations will be required to establish independent auditing committees, and violators of new and existing corporate laws will face tougher fines and jail sentences.