Political and legislative gridlock in Washington means bad news for the economy but not-so-bad news for the defined contribution industry, keynote speakers told attendees at Pensions & Investments' West Coast Defined Contribution Conference in San Francisco held Oct. 30-Nov. 1.
“What better way to give us all a fright than to talk about Washington,” said James M. Delaplane Jr., the Washington-based principal in government relations for Vanguard Group, who took the gridlock-is-good approach in his day-after-Halloween address.
“Almost all of the focus in Washington will be on big-picture issues like the deficit and debt,” Mr. Delaplane said. Thanks to “significant partisan paralysis,” he predicted there would be “relatively little” legislative activity affecting the retirement industry until after the 2012 presidential election.
Mr. Delaplane said the so-called supercommittee probably will not have much impact on the retirement industry. This is the committee of 12 U.S. senators and representatives trying to find ways to reduce the federal deficit. It is supposed to recommend cutting future deficits by at least $1.2 trillion over the next 10 years, and it faces a Nov. 23 deadline.
Although Mr. Delaplane doubted the committee would go after tax incentives aiding the DC industry, he said it might recommend imposing higher premiums paid by defined benefit plans to the Pension Benefit Guaranty Corp.
The supercommittee “won't make hard choices,” said Neel Kashkari, managing director and head of new investment initiatives at Pacific Investment Management Co. LLC, Newport Beach, Calif., who said congressional inaction — or weak action — will hurt the economy in the long run.
He bemoaned the lack of cooperation among political parties in Congress, calling the recent debt-ceiling crisis an “embarrassment for our country.”
One recent example of both parties coming together, he said, was when Democrats and Republicans “agreed to legislation that stabilized the economy.” The Troubled Asset Relief Program was signed into law by President George W. Bush in October 2008. Mr. Kashkari supervised TARP as assistant secretary of the treasury for financial stability.
“The economy had a debt-induced heart attack” in 2008, said Mr. Kashkari, likening the economy to an obese patient who keeps putting on weight. In this analogy, extra debt equals extra weight. “We stabilized the patient,” said Mr. Kashkari, referring to TARP, “but the patient is still on the gurney and is still obese.”
A major source of the financial obesity is entitlement spending — for Medicare and Social Security — that is expected to continue to grow at unsustainable rates, Mr. Kashkari said. He favors means testing for entitlements as one treatment for financial obesity, adding that both Democrats and Republicans find the concept objectionable for different reasons. Other possibilities are raising the retirement age or raising revenue by increasing taxes.
Mr. Kashkari said he doesn't expect Congress to take much forceful action until after the 2012 presidential election — and even then he isn't sure how decisive Congress will be. Despite his concerns about Congress, Mr. Kashkari said he is “not bearish” on the U.S. “Every country has as many challenges — or more challenges,” he said.