Auditors: Too Few to Fail - New York Times

CAN you believe this KPMG thing? A mere three years after Arthur Andersen - once the most upright accounting firm in the land - was indicted for obstructing justice in the Enron scandal, KPMG has come this close to suffering the same fate for peddling illegal tax shelters. The Andersen indictment effectively put the firm out of business (even though the Supreme Court later overturned its conviction), costing thousands of jobs and shrinking the number of major accounting firms to four from five. Without question, the same fate would await KPMG were it to be prosecuted; accounting firms simply cannot withstand an indictment. Can anyone say "The Big Three?"

If you've been following the KPMG story, you know two things. First, its actions were truly reprehensible. A 2003 investigation by the Senate Permanent Subcommittee on Investigations leaves no ambiguity: the firm absolutely knew the shelters it was devising would probably not pass muster with the Internal Revenue Service, but sold them anyway. Everything about these products and the way they were marketed was sleazy. The smallest of the Big Four, KPMG used them to bolster revenue - they are said to have generated $124 million in fees for the firm - and the executives involved were rising stars. In the Enron debacle, Andersen's fundamental sin was spinelessness; its auditors weren't willing to stand up to a high-paying client determined to bend (and break) accounting rules to post fictitious profits. Though it affected fewer people, KPMG's behavior was more mendacious.

Yet the word now seems to be that the Justice Department will probably not indict the firm. This is partly because KPMG has belatedly apologized, admitted the tax shelters were "unlawful," and cut adrift its former rising stars (and tried to shift the blame for the shelters to them). And it is working to come up with a deal with prosecutors that, however painful, will fall short of the death penalty.

But it's also because the government is afraid of further shrinking the number of major accounting firms. Remember when people used to say that the major money center banks were "too big to fail"- meaning that if they ever got in real trouble the government would have to somehow ensure their survival? It appears that with only four big accounting firms left, down from eight 16 years ago, there are now "too few to fail." How pathetic is that?

IF you ask accounting experts about the state of the profession, post-Enron, they'll say that by and large accounting has become at least marginally better, if only because accountants have had the fear of God put into them.

The 2002 Sarbanes-Oxley ethics law eliminated some of the most egregious practices like using auditing, which ought to be a firm's primary responsibility, as a loss leader to encourage companies to buy their higher-profit consulting services. Sarbanes-Oxley also created a commission called the Public Company Accounting Oversight Board to oversee the profession. And it mandated that companies test their internal financial controls to help ensure that fraud can't slip through. This task has been handed to the accounting firms.

In their very next breath, however, these same experts will also acknowledge that the fact that accounting has morphed into an oligopoly is a huge problem. The Big Four may be doing better audits, at least for the moment, but they fundamentally haven't changed. "Probably the No. 1 issue still is the culture of these firms," said Lynn E. Turner, the former chief accountant at the Securities and Exchange Commission. "It is the same as it was before all the scandals."

Accounting firms are no longer allowed to sell consulting services to companies they audit, but all still do lots of consulting, and that is still an important revenue generator for them. (The hot new area is "risk management.") Partners are still rewarded largely on their ability to bring in new business, as opposed to, say, standing up to companies that want to bend the accounting rules. Accountants used to be motivated by things other than maximizing their income; today, the profession is about making money, just like every other profession.

"What infuriates me about the accounting firms is the enormous power they have," said Howard Shilit, president of the Center for Financial Research and Analysis. "You just can't compel them to do things they ought to do. And the fewer firms there are, the more concentrated their power."

To my mind, the biggest problem is the hardest to change - that accounting firms are paid by the same managements they are auditing. Nobody really thinks about changing this practice mainly because it's been that way forever. But, "it's the elephant in the room," said Alice Schroeder, a former staff member at the Financial Accounting Standards Board who later became a Wall Street analyst. In the memorable phrase of Warren E. Buffett's great friend and the vice chairman of Berkshire Hathaway, Charles T. Munger - quoting a German proverb: "Whose bread I eat his song I sing."

That's why I worry about what will happen once the Enrons, the WorldComs and the Adelphias fade from view, and corporate executives - and their accountants - stop thinking about going to the slammer if they stray from the straight and narrow. That day will surely come, and if the profession hasn't truly reformed, you can pretty much count on a new round of accounting scandals. Companies will start pushing the firms around again, and the firms will start caving again.

That's also why I'm a little skeptical of the main solution I heard for fixing accounting: increasing the number of firms that can do the complex auditing work big companies require - possibly by breaking up the Big Four. (Almost no one believes that smaller firms can handle that kind of work, not even Grant Thornton, the fifth largest, which has fewer than 4,000 employees compared with KPMG's 18,300.) "More choice is always better," said Jack T. Ciesielski, the publisher of The Analyst's Accounting Observer. Mr. Turner, who is now managing director for research at Glass, Lewis & Company, said: "The federal government made a really serious mistake in allowing these firms to merge and merge and merge. There needs to be more competition."

But if we go back to eight firms, or even more, and we haven't changed either the way accountants are paid or their cultural values, won't accounting firms find themselves under even more pressure to do management's bidding? After all, the tougher they are on companies, the greater the likelihood they'll lose the business to another, more pliable firm. It seems to me that this is that rare arena in business where increased competition is likely to make things worse, not better.

I don't really know what the answer is, and I get the sense that nobody else does either. Maybe we should figure out a different way to pay accounting firms - some sort of dunning arrangement, perhaps, so there isn't so direct a financial link between companies and auditors. Maybe we should eliminate the firms entirely and turn accounting into some kind of public utility. I have to admit, I find that idea appealing - it would certainly eliminate the conflicts - but I also know it would bring its own set of problems: encrusted bureaucracy, a likely dumbing-down of the profession, and so on.

What I do know is that accounting is at the heart of our financial system. Without honest accounting, the market becomes a game for insiders to manipulate at the expense of the rest of us. Which is why I'm asking for your help this morning in figuring out how to fix what ails accounting. The New York Times has set up an online forum at nytimes.com/business/columns, where you can weigh in with your ideas about the problems in accounting and what ought to be done about them. Think big. Think blue sky. You don't have to be Mr. Buffett to have a view about this, though if Mr. Buffett would like to say his piece, I would love to hear it.

In a few weeks, we'll have another go-round on this - and with any luck, we'll have some good new ideas. After all, accounting is too important to be left to the accountants.

Enron

This was a 2000 Opinion of the WSJ and-- it is amazing that nothng happened after this for the king.

So it appears that Paul Volcker won't be able to save Arthur Andersen from either itself or the Justice Department. The former Fed chairman certainly has succeeded, however, in educating the rest of us about what ails the accounting profession.
We started out as reform skeptics, and in an ideal world we'd still prefer that corporate audits be a competitive product without a federal mandate. But after watching many Andersen partners sabotage Mr. Volcker's rescue effort, and seeing Andersen's Big Four competitors circle their wagons to block reform, we wonder if these fellows can be trusted with the grocery money, much less with restoring public confidence in shareholder capitalism.

The accountants have become their own worst advocates. Their lobby's chief theorist, Barry Melancon of the American Institute of Certified Public Accountants, came by to see us and was going on about all of the schemes that auditors expose but the public never learns about. So, someone quipped, you're just like the CIA; to which Mr. Melancon replied, all too seriously, "Yes, that's right." Trouble is, while the CIA runs on secrets, capitalism is supposed to run on information and public accountability.

Then, just days after defending auditors who also do consulting for the same corporations, Mr. Melancon had to acknowledge a conflict of interest of his own because he had profited from the commercial ventures of what was supposed to be his nonprofit institute. It's as if the boxing reform commission had sent us Don King.

The self-immolation of Andersen has been even more revealing. The government played a role with its shoot-first-ask-later indictment of the entire Andersen firm for shredding documents. But even Justice was willing to defer prosecution if Andersen's partners had been willing to admit some culpability. They refused, making it seem as if the firm's partners, or at least many of them, are more afraid of Mr. Volcker than they are of federal prosecution.

We hear that one clause in the draft Justice settlement would have required Andersen to implement Mr. Volcker's proposed reforms. Most notably, this would have meant making Andersen an "audit-only" firm, without lucrative consulting services, the way accounting partnerships once operated. The partners reacted as if they'd rather have Andersen collapse, as it now probably will, leaving them free to jump to one of the remaining Big Four. They seem to believe that if they jump ship they'll also be shielded from liability suits from Enron shareholders, which may be wishful thinking since that has never been tested in court.

As for the remaining Big Four, most of their partners want nothing to do with Mr. Volcker either. They realize that if Andersen fails they'll have less competition, not to mention the ability to cherry pick Andersen partners and clients. They also know there's little chance that Mr. Volcker's proposals will be picked up inside the Beltway.

SEC Chairman Harvey Pitt used to work for the accounting industry, and he's a big fan of auditing and consulting for the same client. He seems content to put former Xerox chief Paul Allaire in the public stocks as a lesson to other CEOs -- while letting accountants continue business as usual. The industry also seems justified in its confidence that the White House won't lobby for reform; its campaign contributions in 2000 went heavily to George W. Bush.

Normally we find "conflict of interest" stories duller than public television. But as long as the government mandates public audits, they ought to be credible. In recent years they haven't been, what with more earnings restatements in the past three years than in the previous 10. Yes, in the wake of Enron the market is now enforcing a new earnings discipline on corporate America.

But we see no such self-reflection in the culture of the accounting industry, which has blamed Enron and other debacles on everything but its own standards. The federal audit mandate gives accounting firms some guaranteed business but in return for holding a public trust. The credibility of their audits matter more than their ability to offer other services that let them live like investment bankers.

The accountants may think they've outsmarted everyone by sinking reform along with Andersen. And they may be right. On the other hand, if there's another Enron out there, they may yet wish they'd taken Mr. Volcker's advice.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

BW Online | January 13, 2003 | Barry Melancon

When the big audit failures of Enron Corp. and WorldCom Inc. came to light, the last person the American Institute of Certified Public Accountants needed as their chief executive was Barry C. Melancon. Even after the dismal performance of Arthur Andersen LLP at Enron and the collapse of the accounting firm, Melancon, 44, still argues that accountants should be allowed to solicit lucrative consulting deals from the companies they audit. Melancon insists there is no proof that Andersen's auditors were influenced by the firm's side deals. His stance left AICPA with little say as Congress drafted reforms.

No one should have been surprised. It was Melancon who, just before the scandals broke, led the organization to spend $4.7 million to try to persuade its 340,000 CPA members to offer a new, easier-to-obtain credential that would nonetheless certify that its holders possessed "breadth of knowledge, strategic focus, and professional rigor." Melancon thought this would help draw in more young people to the profession, but the proposal was rejected.

Melancon, who earns $600,000 a year, signed a second five-year contract in 2000. "I am very passionate about this profession and this organization," he says. "I am a change agent." If accountants really want to win back trust, they should change agents.

AICPA's Melancon Named Among Worst Managers of 2002

AICPA's Melancon Named Among Worst Managers of 2002

BusinessWeek magazine released its annual Best Managers of the Year list last week for 2002 and enhanced this year's list with a complementary Worst Managers of the Year. According to the magazine's editors, the turbulence of 2002 caused the addition of the worst managers to this year's list.

Included among the list of 20 worst managers of the year is Barry Melancon, chief executive of the American Institute of Certified Public Accountants. Joseph Berardino, former CEO of now defunct Arthur Andersen LLP, was named to the list of The Fallen..

Mr. Melancon, according to BusinessWeek, continues to argue that accountants should be able to audit and provide consulting services to the same clients, despite to the repercussions of the obstruction of justice charge levied against former Big Five Andersen for its failed audit of Enron as well as a series of other auditing/consulting scandals that have plagued businesses in the past year.

Mr. Berardino was accused by the magazine's editors of failing to take a hard line on ethics when he took over the helm of Andersen in the wake of scandals that had already marred the image of the Big Five firm, including Waste Management and Sunbeam. Instead, BusinessWeek reports, the CEO pointed the firm in the direction of continued revenue growth and landed himself not only on the unemployment line but in the BusinessWeek list of The Fallen managers.

BW Online | February 3, 2003 | Putting Managers in Their Rightful Place

What a "surprise" to see this: chairs or chairs to be-- saying Barry is the best. Wake-up. Who is kidding whom?

This Top Accountant Deserves More Credit

I recently had the privilege of speaking with David Henry about a story he was writing on the American Institute of Certified Public Accountants and, specifically, its CEO, Barry C. Melancon ("Bloodied and bowed," Finance, Jan. 20). Shortly after the interview, I was stunned to read that BusinessWeek included Melancon in its list of the worst managers for 2002 (Cover Story, Jan. 13). Melancon led our profession in supporting the creation of a new Public Company Accounting Oversight Board. He was also instrumental in garnering the support of those most affected--witness the AICPA announcement on Jan. 17, 2002, in support of the Securities & Exchange Commission plan to create such a board.

This is leadership, great leadership, which you should recognize.

James Castellano
St. Louis

Editor's note: The writer is the immediate past chairman of the AICPA board of directors.


Since you named L. Dennis Kozlowski as one of the best managers of 2001, I am assuming that you used the same performance measures in naming Barry Melancon as one of the worst managers of 2002. As a practicing CPA in a local 55-person firm, a member of the AICPA board of directors, and chairman-elect of the board, I have a working perspective on Melancon's performance. Initiatives explored and dollars spent by Melancon were member-driven and approved by the 23-member board and 265-member governing council. That the credential initiative cited in your report was voted down by the membership at large is a testament to the fact that members, unlike stockholders, drive the organization. Leaders like Barry Melancon provide them with opportunities.

Scott Voynich
Columbus, Ga.

Fraud Updates on November 30, 2002: "'The Man With Nine Lives, by Elizabeth MacDonald, Forbes, November 25, 2002 --- http://www.forbes.com/forbes/2002/1125/060a.html
Under fire from accounting scandals and charges of self-dealing, Barry Melancon is hanging on as head of the American Institute of Certified Public Accountants
For Barry Melancon, the 44-year-old chief executive of the accounting industry's self-regulatory body, it's been a terrible year. A wave of accounting scandals has damaged the AICPA's image. On his watch, the AICPA has been accused of giving short shrift to the auditing rules it sets, which are supposed to protect investors. And under Melancon, the AICPA has set up a Web site that ignited a barrage of conflicts-of-interest charges against him.

Some 160 member accountants have signed a petition asking him to resign. BDO Seidman, the fifth-largest accounting firm, has sued the AICPA over the site, alleging Melancon is trying to enrich himself and that the AICPAis wrongfully competing with accounting firms. An AICPA member has filed an ethics violation accusing him of self-dealing. (None of the AICPA's chiefs, including Melancon, has ever had a finding against them.) Now, Congress has yanked the AICPA's auditing oversight duties away from it and given them to a new federal board. Some wonder how Melancon can hold on to his job.

'I think the AICPA under Melancon's leadership has been the least effective, most backward, most obstructionist group that I encountered in my eight years running the SEC,' says Arthur Levitt, former Securities & Exchange Commission chairman. Lynn Turner, former SEC chief accountant, agrees. 'If Melancon were a CEOof a company, he'd be fired by now,' says Turner, who recently received a big round of applause in a speech before 700 accountants when he called for Melancon to step down.

Part of Melancon's problem is that he's a lightning rod at the worst time for accountants. "Unfortunately, the actions of a few bad ones reflect negatively on all of us," he says. But during his term, the things the AICPA let slide when the markets were at giddy heights are believed to have hurt investors. For instance, Melancon fought the SECover auditor independence rules that Levitt and Turner say would have stopped conflicts involving auditors selling consulting services to their audit clients. The AICPA also didn't tighten rules for simple things, like forcing auditors to provide detailed documentation for an audit or to query lower-level management for problems or even to look at journal entries, says Douglas Carmichael, director of the Center for Financial Integrity at Baruch College in New York. Instead the rules get lazy auditors off the hook by simply letting them obtain a letter from a company that says it isn't faking its numbers, says Carmichael, who notes auditors like weak rules, since they can use them as a defense when sued.

So why doesn't the AICPA boot Melancon? Because he's a business builder intent on making a buck--and that's what its board wants him to do. "Barry brought to the AICPA what the profession wanted: a business approach," says board member Michael Mountjoy. Melancon adds the AICPA has "not reduced one iota the resources" that it puts into standards.

To turn a profit, Melancon launched the site, called CPA2Biz, in February 2001. As chairman of the Web site, he got CPA2Biz the exclusive rights to sell the nonprofit AICPA's products, such as auditing manuals. The products brought in $64 million out of the institute's $165 million in 2001 operating revenue. The AICPA raised $70 million from investors such as Microsoft, Thomson and Aon, which bought half the site; the institute invested just $900 for its 50% stake. While the site has never made a profit, Melancon says the companies are at risk for losses. "In other environments people would be lauded for that," he says.

An initial public offering (at a possible $10 a share) was planned for the site. That meant Melancon's personal $100,000 investment in the site could have been worth $12 million. Though no IPOhas occurred, accountants fumed over his stake, which he says won board approval. To quell his critics, Melancon announced in March that he donated it to an accounting foundation.

Even so, Melancon has morphed the once-venerable AICPA into a paid endorser of its financial backers' products, some of which were denounced as inferior by accountants, like Microsoft's small business accounting software, which was eventually killed. And the AICPA gave a contract worth millions to a Thomson unit for exclusively administering an electronic version of the CPA exam. Though that raised the ire of the Texas State Board of Public Accountancy, it now says Melancon has since convinced it that the unit was the best outfit for the job.

While the board says it is behind its man, Melancon hedges whether he will renew his five-year contract when his second term expires in 2005. "We went through a hard year," he says."

AICPA Personal Financial Planning

nice to see this older article which quotes me. Peter Fleming is a good writer. pb

TaxProf Blog: Jon Stewart Daily Show Video of Tax Consequences of Oprah's Car Giveaway: "Check out the hilarious 5-minute video of Jon Stewart's Daily Show segment on the tax consequences of Oprah's car giveaway "

Financial Advisers and Planned Giving: Doing the Right Thing

Here is my story in the recent issue of CPA Journal...

JUNE 2005 - High-net-worth individuals have been scrambling to find ways to donate funds to charity without the problems and setup costs of traditional charitable planning vehicles. With the generational transfer of wealth over the next 50 years estimated at $40 trillion to $130 trillion, now is the ideal time to start thinking about philanthropic planned giving.
There was initial concern that the recent reductions in the capital gain tax rate would lead to less charitable-giving. From an economic point of view, this could prove be true. On the other hand, giving is important to people. Attitudes toward philanthropic giving do not appear to have changed much. Charitable giving is a matter of charitable intent and financial strategy. Individuals intent on creating value for themselves through charitable giving will often seek, appreciate, and reward appropriate advice on complex philanthropic issues.

Generosity

In a true story of philanthropic motivation, a hard-working farmer, with a frugal lifestyle and a knack for investments, bequeathed his $16 million estate to a $3 million foundation. The 94-year-old man had never married and had lived frugally for 75 years on his 50-acre farm, where he rented out a number of small homes and cottages. He left the proceeds from the sale of his farm, as well as an investment portfolio worth about $6 million, to the organization. He never made contributions to the organization before, and had to look up its phone number. The organization wishes it could say that it cultivated the donor or that the donor understood and supported its work, but the truth is that the gift was donor-driven. The organization did not plan for the gift, but was thankful for receiving it.

In another true story, a headline in the Chronicle of Philanthropy read: “Brown U. Receives $100-Million From Businessman.” Billionaire Sidney E. Frank donated $100 million to endow an undergraduate scholarship fund. It was Frank’s second gift to Brown University in three months; he had already donated $20 million to build an academic center. “Previously, however, Mr. Frank … had barely given the university any money: [h]is only other donation on record was $100 to the university’s annual fund in 1977,” the article noted. No prior history indicated that such gifts were coming.

Stories like these are endless. The Independent Sector conducted a national study of more than 4,000 adults that measured the everyday generosity of Americans. According to this study, 89% of households make charitable gifts; the average annual household contribution is $1,620.

Do Estate Taxes Matter?

Estate-tax avoidance is considered a major motivator of charitable bequests. Estate taxes start people thinking about charitable giving. Often, individuals with sufficient assets to raise estate-tax issues talk to a financial advisor, lawyer, or CPA about their tax concerns without raising the question of charitable contributions. It is likely that many of these individuals would like to pursue charitable bequests but need to have the options presented to them. Even if estate planning triggers charitable planning, the primary reason people make charitable bequests remains charitable motivation.

Importance of the Relationship

In another true story, the Jewish Federation of Central New Jersey recently received a $70,000 bequest from a woman with virtually no previous relationship with the organization. Her second husband had a vacation bungalow in the community; she lived with him for seven years before his death.

The husband was charitably inclined, but had no ideas about which organizations to support. Because the man lived in the community and was Jewish, his attorney suggested leaving a portion of his estate to the Federation. Amy Cooper, director of financial resource development for the Federation, had never met the man. When he died, the attorney notified her that the Federation was in his will, but that his assets had gone to his surviving spouse.

Cooper began a relationship with her. When she moved, Cooper stayed in touch. Cooper visited her when she was in New Jersey, and called around the holidays. The conversations always ended with her telling Cooper that she had kept the Federation in the will. She honored her promise, and the Federation received the bequest as a distribution from her estate. The attorney who originally suggested the gift, in response to the husband’s desire to give, attributes the eventual bequest to the warmth of the relationship that Cooper established with the spouse.

The seven faces of philanthropy. In The Seven Faces of Philanthropy: A New Approach to Cultivating Major Donors (Jossey-Bass, 2001), authors Russ Alan Prince and Karen Maru File discuss how to communicate about value in a way that fits an individual’s philanthropic personality. The book identifies and simplifies giving patterns and motivations. The seven “faces” are:

Communitarian: Doing good makes sense.
Devout: Doing good is God’s will.
Investor: Doing good is good business.
Socialite: Doing good is fun.
Altruist: Doing good feels right.
Repayer: Doing good in return.
Dynast: Doing good is a family tradition.
Donor-Advised Funds and Planned Gifts

Donor-advised funds, developed by many financial service firms, such as the Fidelity Charitable Gift Fund and the T. Rowe Price Program for Charitable Giving, have opened new opportunities for funding planned charitable giving. Compared to private foundations, donor-advised funds are simple, inexpensive, and more flexible. Despite the increased visibility of such funds and other planned giving tools, however, most charitable donations are not channeled through these funds or through private foundations, but through other means.

There is plenty of opportunity for individuals to learn about their charitable interests and have them focus on the simplest and most popular form of planned gift, the bequest. The distinct advantage of bequests over other gifts is that they are conceptually similar to making a gift through a will. Furthermore, people are often more comfortable discussing how to make significant gifts at death, rather than during life, particularly when the costs of health-care and long-term care are so uncertain.

To test the waters, one might make a relatively small life-income gift, to evaluate an organization’s ability to manage it. For example, a small charitable gift annuity can lead to future gift annuities of greater amounts if the donor is satisfied with the organization’s management. People that make a bequest to a favorite charity are unlikely to remove it, even when updating their estate plans. They often consider the gift complete, even though it is revocable.

Another factor that encourages people to give to charity is responding adequately to their questions. Planned giving directors or development directors can also thank or secure bequest donors through personal visits and donor recognition events, which can lead to discussing the benefits of life-income gifts. This can be particularly attractive when a donor has earmarked highly appreciated, low-income stock or real estate for donation to an organization.

Individuals converting a bequest to a life-income gift will obtain significant tax and income benefits by making a revocable commitment into an irrevocable gift. Often, retired individuals who live modestly have assets that, upon conversion to such a gift, can significantly strengthen an organization, while providing the individual with significant income.

Taking the First Step

The following is what a financial advisor can do to better serve clients interested in charitable giving:

Join an organization’s professional advisory committee to learn from peers about charitable giving. Some charitable organizations sponsor seminars that fulfill professional education requirements and feature informative sessions.
Think about what makes people charitably inclined. This will help in discussions about giving to charity. It is possible that an advisor’s motivations may be similar to those of the client.
Let potential donors dream out loud about what is important to them and why. If advisors listen closely, they will learn whether their clients are charitably inclined and what they can do to help.

--------------------------------------------------------------------------------
Phyllis Bernstein, CPA, is president of Phyllis Bernstein Consulting, Inc., New York, N.Y. She can be contacted at phyllis@pbconsults.com or www.pbconsults.com.

USATODAY.com - Can the rich, famous save Social Security?

By Dennis Cauchon, USA TODAY

Can Tiger Woods save Social Security?

According to 'Forbes,' Tiger Woods is the highest-paid athlete in the nation, making $80 million in 2004.
By Tony Gutierrez, AP

The question is not as far-fetched as it sounds. President Bush broke political orthodoxy April 28 when he proposed that Social Security benefits grow more slowly for "better off" workers than low-income workers.

The president's proposal raised the tantalizing question: Can Social Security be fixed on the backs of the wealthy — leaving most Americans unscathed?

The populist theme of targeting the affluent has become one of the most talked-about approaches for solving the retirement system's financial problems. Like his call for individual investment accounts, the president's willingness to discuss treating the rich and poor differently has opened a new chapter in the Social Security debate.

Taxing all income and capping benefits would fix Social Security — mathematically, at least. The program would run a permanent surplus if all income — including the millions earned by athletes, movie stars and corporate tycoons — were subject to the 12.4% Social Security tax and if benefits for the affluent were capped at current levels, according to the Social Security Administration.

Americans say they like the idea of making the rich pay more and get less. More than two-thirds support cutting benefits for the affluent and applying the Social Security tax to all income, not just the first $90,000 earned, according to a USA TODAY/CNN/Gallup Poll in February. These extreme changes have little political support in Washington today because they would impose a $100 billion-a-year tax increase on the wealthy and turn Social Security into more of a welfare program than a pension plan.

But the idea offers a measure of how radically the system must be restructured to make it financially sound and how politically difficult it will be to do so.

Simply trimming benefits for the wealthy does little to help Social Security. The rich are too few in number and get limited benefits already.

Small increases in the amount of income subject to the Social Security tax — such as lifting the cap from the current $90,000 to $140,000 — don't help much either. For the soak-the-rich strategy to work, higher taxes must be aimed at the super-rich.

How it would work

Call it the Tiger Woods effect. The nation's highest-paid athlete — $80 million last year, Forbes magazine estimates — illustrates how Social Security tax hikes and benefit cuts would work:

•Cut Woods' benefits The golfer's benefit would be reduced by about $3,500 a year starting in 2042 when Woods turns 67, under the plan mentioned by Bush.

•Tax Woods' first $140,000 of income. The golfer would pay an extra $6,200 a year if the amount of income covered by the Social Security tax were raised from $90,000 to $140,000, a figure on the high end of recent proposals.

•Tax all of Woods' earnings. The golfer would pay $10 million in Social Security taxes a year, up from $11,160.

Social Security's long-term deficit — $3.7 trillion over 75 years — is so severe that little short of $10 million a year from Tiger Woods and comparable amounts from other rich people will bring the system into balance.

If the wealthy paid 12.4% payroll taxes on all their income but kept their current benefits, Social Security's deficit immediately would become a projected $540 million surplus, the Social Security Administration estimates.

Even if the rich got higher benefits to reflect their bigger tax bite, Social Security would close its long-term deficit by 93%.

Outside the general public, the idea of taxing all earnings and cutting benefits for the affluent has little support.

Liberals such as Sen. Edward Kennedy, D-Mass., oppose it because they fear it will undermine political support for the program and recast Social Security as a welfare system rather than a pension program.

Conservatives such as the president oppose taxing all income because it would raise taxes $100 billion a year immediately, push the top federal tax rate to 50% and could damage the economy.

Even those who favor making the wealthy pay more are cautious.

"People with money are going to have to carry more of the burden," says Bob Dole, the former Republican presidential nominee and Senate majority leader, himself a multimillionaire. "It just can't go so far that Social Security looks like a welfare program."

Social Security is well known for helping reduce the number of elderly living in poverty from 35% in 1960 to 10% today. Less well known is the program's payoff for the affluent.

The program's biggest benefit checks go to retirees living in the 1.5 million households that enjoy $100,000 or more in annual income. These households receive an average of about $19,781 a year in Social Security benefits, according to the Internal Revenue Service. That's about $6,000 a year more than households earning less than $100,000. Dole, 81, says he gets $2,120 a month.

But even ending all payments to households with incomes above $100,000 — the top 5% of households getting benefits — would have saved only about $30 billion of the $415 billion in retiree payments made in 2004.

Taxing the rich, famous

For the tax-the-rich strategy to work, the dart must be aimed at the highest of all earners — star athletes, corporate chiefs, investment bankers, movie stars, trial lawyers.

Major League Baseball's payroll alone would provide $275 million a year in new Social Security taxes — the same as 220,000 workers earning an average of $100,000.

Taxing all of Wall Street's bonuses — $15.9 billion in 2004 — would reap nearly $2 billion a year. That's the same as 1.6 million workers earning $100,000.

The rich and famous would suddenly be a lot less rich:

• NBA star Shaquille O'Neal's three-year, $87 million contract would produce $11 million in new taxes.

• Actress Julia Roberts would pay $2.4 million in additional taxes on a $20 million movie contract.

• Jay Leno and David Letterman would pay a combined $7 million a year in new taxes.

• Billionaire Sumner Redstone, the nation's 20th richest man, would pay $2.7 million in additional taxes on his $21.5 million salary and bonus at Viacom, which owns CBS and MTV.

Invitation to tax dodging?

Imposing the Social Security tax on the ultra-rich would push the nation's top federal tax rate from the current 37.9% to 50.3% — and near 60% in California and other high-tax states. The top federal income tax rate is 35%. The Medicare tax is 2.9% on all income.

This would reverse the economic revolution of the Reagan era that lowered top tax rates to stimulate the economy by encouraging investment and work while reducing tax-dodging.

Some economists warn that high tax rates could devastate economic growth, even if they make Social Security richer. "High marginal rates drag the economy down and result in massive tax avoidance," says Florida State University economist James Gwartney, co-author of Common Sense Economics.

With so much money at stake, the tax would be dodged. "The rats would come out of the basement with all kinds of tax strategies to reclassify salary as another type of income," says Paul Caron, a tax law professor at the University of Cincinnati.

For example, a surgeon earning $1 million might direct his earnings to a corporation he owns. He'd pay himself a $200,000 salary and classify $800,000 as dividends.

But Social Security can be a tough tax to dodge because it is a pure flat tax, skimmed off the top before deductions. It applies to all income earned for services rendered, so its reach is extremely broad, covering endorsements and bonuses.

Caron says athletes would have a hard time avoiding the tax. "A sport that has a salary cap will have a hard time saying it's not paying salaries," he says.

Even if an athlete couldn't elude the Social Security tax, the high tax rate would create a greater incentive to dodge regular income taxes. While Social Security might collect more, "the federal government, as a whole, will collect less money if the top marginal rates return to 60% or 70%," as they were as recently as 1981, Gwartney says.

For example, a professional athlete might spend $1 million on a fancy gymnasium, a deductible business expense, to avoid paying $500,000 in federal and state taxes at a 50% rate.

"You're just inviting people to evade taxes," says Dean Baker, a Social Security expert of the liberal Center for Economic Policy Research. "It's counterproductive and you won't get as much money as you expect."

And the Social Security tax would hardly nick many of the richest people. Microsoft founder Bill Gates, worth $46.5 billion, earns less than $1 million a year in salary. His income comes from dividends and stock sales, which are not subject to Social Security taxes.

In fact, half the income generated in the top 2% of households — the 2.5 million families that earned more than $200,000 in 2003 — would escape the Social Security tax because the money comes from stock sales, dividends and other exempt sources.

'A political disaster'

Taxing all income could create another problem: huge monthly benefit checks for the richest people. That's because Social Security benefits are based on the taxes people pay into the system.

If Social Security taxed all income — not just the first $90,000 — New York Yankees superstar Alex Rodriguez would be entitled to $1.6 million in annual benefits starting at his full retirement age of 67, based on his career earnings, including his current 10-year, $252-million contract, according to a USA TODAY calculation. Woods would stand to get $5.9 million a year.

"It would be a political disaster" for Social Security to pay millions to millionaires, says David John, a Social Security expert for the conservative Heritage Foundation in Washington.

It wouldn't be disastrous for Social Security, though. Based on Rodriguez's life expectancy, Social Security would collect $32.5 million in taxes from the ballplayer and pay the elderly A-Rod only $15 million.

John says denying the affluent benefits for added contributions would be a mistake. "That makes it a welfare program," he says. "It requires abandoning the idea that Social Security benefits are tied to the contributions," he says.

'Breach of faith'?

Liberals take an even harder line at denying benefits to the rich, saying the system should be considered a pension program. "It's a breach of faith to make the wealthy pay and get nothing in return," says Michael Ettlinger, director of economic analysis at the liberal Economic Policy Institute.

The idea that rich and poor are treated alike in retirement programs is so central that Kennedy tried to block the Medicare prescription drug benefit in 2003 because it charged the rich more than the poor. "Hold on to your hat," he declared. "Today, Medicare. Tomorrow, Social Security."

"It's the strangest thing," says Bruce Josten, chief lobbyist for the American Chamber of Commerce and a supporter of cutting benefits for the affluent. "I (mention) cutting benefits for the wealthy everywhere I go, and I can't find anyone willing to buy the argument — not politicians or even well-off people themselves."

Rockin' the Torah - New York Times: "We thought that the highbrow contributions that Jews have made to culture have been amply celebrated,' said David Segal, a staff writer for The Washington Post. 'We wanted to aim lower.' So instead of expending the time, energy and Internet bandwidth to build a Web site dedicated to all the Jews who made their names in the arts, Mr. Segal and the other founders of Jewsrock.org opted for a less ambitious project: a virtual shrine to the sons and daughters of Israel who have practiced rock 'n' roll. Another curator for Jewsrock.org - coming soon, though a beta version has been running for several weeks - is Jeffrey Goldberg, a staff writer at The New Yorker, and its manager is Allen Goldberg (no relation), director of branding and communications at XM Satellite Radio. The site pays semi-serious tribute to rockin' Jews both genuine and honorary, from Bob Dylan and Lou Reed to two-thirds of Sleater-Kinney.
Dubbed the Jewish Rock and Roll Hall of Fame, until some unpleasant mishegoss involving the Rock and Roll Hall of Fame and Museum in Cleveland necessitated a name change ('Is there anything more un-rock 'n' roll than a temporary restraining order?' Mr. Segal asked), Jewsrock.org plans to offer such diverse content as essays on the Sex Pistols manager Malcolm McLaren and the clothier Nudie Cohen; a recipe for chopped liver from the Dictators' frontman, Handsome Dick Manitoba; and even a place where Jewish rock fans can - gasp! - show their decidedly unkosher tattoos. 'It's a shanda' - a shame - Mr. Segal admitted. 'It's a part of rock 'n' roll culture, and it's totally against tradition, but there are Jewish people out there who just can't resist.'
Perhaps the most compelling feature is the online quiz 'Jew or Not?' Visitors are shown photographs of well-known rockers and asked to guess whether they're members of the tribe. The quiz says Paula Abdul and Billy Joel are indeed Jewish, as are all four members of the pop-rock band the Knack, and even the woman who inspired their hit 1979 single "My Sharona." (She now sells real estate in Los Angeles.) By the somewhat malleable Jewsrock.org criteria, so too are Beck (a well-known Scientologist), the Strokes guitarist Nick Valensi (who has only a Jewish father) and the punk group New Found Glory (three of their five members actually are), but really, who's kvetching? "We're not operating under rabbinical supervision, let's put it that way," said The New Yorker's Mr. Goldberg. "If we like you, you can be Jewish. I've been wanting someone to write a piece claiming Ozzy Osbourne for the Jews, just so I can put the headline 'Black Shabbos' on it."

Thieves Steal Israeli's Olympic Gold Medal - New York Times: "JERUSALEM (AP) -- Thieves broke into the home of Israeli windsurfer Gal Fridman's parents on Tuesday and stole his Olympic gold medal from the Athens Games.
Fridman discovered the theft when he went to his parents' home in Karkur in northern Israel on Tuesday morning, Police Chief Inspector Moshe Weizman said.
Fridman became an instant national hero last August when he won Israel's first gold medal. He also won a bronze medal at the 1996 Atlanta Olympics, and that also was stolen, along with a gun and some papers.
''It's not that they took my achievements. I'm still Olympic champion. No matter what they do they can't take that away from me,'' he told Israel TV. ''But it clearly still hurts. (The medals) have a lot of sentimental value, and are very special to me.''"

Andersen Ruling Could Aid Appeal of Former Banker - New York Times

The Supreme Court's decision yesterday to overturn the conviction of Arthur Andersen may be a significant development for a different defendant: Frank P. Quattrone, the former investment banker who was convicted of obstruction of justice and witness tampering last year.

Mr. Quattrone, who is appealing the verdict, was convicted after sending an e-mail message to Credit Suisse First Boston's technology bankers in December 2000 endorsing a colleague's instructions that urged them to "clean up those files" and reaffirmed the company's document retention policy.

Prosecutors contended that Mr. Quattrone had just learned of a grand jury investigation into how the bank was allocating hot stock offerings and that he sent the message to try to keep crucial documents from being unearthed.

No essential documents were ever destroyed and the investigation never resulted in criminal charges against the bank or its employees except for the case against Mr. Quattrone.

The Supreme Court's reversal of the Anderson verdict may strengthen Mr. Quattrone's appeal because justices struck down language used in the jury instructions in the Andersen case that allowed for a conviction even if the defendant did not know it was doing anything illegal.

The judge in Mr. Quattrone's case used some similar language.

At one point, in regard to a witness tampering count against Mr. Quattrone, the judge told jurors "you do not have to find, and there is no requirement that you find, that the defendant knew a proceeding was in fact pending or was even about to be initiated at the time of the corrupt persuasion or misleading conduct."

In the Supreme Court's opinion yesterday, the court reiterated its position from an earlier ruling on a similar matter.

The court said also that document-shredding is routine, and so is legal advice that a person or company resist turning over documents, saying that such resistance "is not inherently malign."

Mr. Quattrone's rebuttal appeal brief was due yesterday, but he and his lawyers, with the consent of prosecutors, asked for an extension as a result of the Supreme Court ruling.

"The Supreme Court's decision in Andersen has important bearing on several arguments Quattrone made on appeal," wrote Christopher Hyde-Giampapa in a filing to the United States Court of Appeals for the Second Circuit.

Senate May Be Ready To Help Airlines On Pensions - New York Times:

WASHINGTON (Reuters) - A key Senate lawmaker said on Tuesday he was ready to help airlines close pension gaps, as chiefs of two carriers warned legislative action is needed soon for their companies to avert possible bankruptcy.

Sen. Charles Grassley, the Iowa Republican who chairs the Senate Finance Committee, said he was willing to let airlines stretch out pension payments, but airlines should freeze plans so no more benefits are promised that they cannot pay.

Gerald Grinstein, chief executive of Delta Air Lines and Douglas Steenland, chief executive of Northwest Airlines, earlier told Grassley's committee that pensions covering more than 150,000 workers and retirees are unmanageable and could push each into court protection.

``There is no question that the single biggest uncertainty that may well determine whether or not Delta can successfully restructure outside of bankruptcy court is the pension cloud that hangs over the company,'' Grinstein said.

Delta and Northwest -- the third and fourth largest domestic carriers -- are lobbying for legislation that would give airlines up to 25 years to repair pension underfunding.

Steenland called for immediate action. ``This is something we can't fix ourselves.''

Under current pension funding rules, Delta must contribute about $2.6 billion to its retirement plans to eliminate the gap between what those accounts hold in assets and what the company has promised in benefits. At the end of 2004, Northwest's pensions had $5.5 billion in assets and projected benefits of $9.2 billion - a difference of $3.7 billion.

Grassley's committee is working on a pension bill and said tinkering with funding rules alone was not an acceptable remedy. He said his plan would be comprehensive and could include proposals offered by the Bush administration to rewrite rules for all companies that offer traditional pensions.

Congressional aides in both houses of Congress have said a consensus has not developed on letting airlines amortize pension contributions over a long period after a $15 billion bailout in 2001 and pension funding breaks approved last year.

``It's quite obvious that 25 years is ridiculous. I want to see them made whole while I'm still in Congress,'' Grassley told reporters after the hearing. ``We need to keep the airline industry alive ... We're talking about the economy of the United States.''

Grinstein said reducing the 25-year payment schedule could work but didn't suggest an alternative time span.

Federal pension insurers told the hearing that the most troubled corporate plans -- many of them run by airlines -- are falling further into the red.

Pension underfunding for 1,108 plans at major U.S. companies rose 27 percent last year to a record $353.7 billion from $279 billion in 2003, the Pension Benefit Guaranty Corporation said. Those accounts cover 15 million people.

Financed by premiums paid by corporations, the pension agency is facing a $23.3 billion deficit fueled partly by having to assume control of pensions at United Airlines and US Airways, the No. 2 and No. 7 airlines respectively, and both in bankruptcy protection.

Federal insurers recently agreed to guarantee $6.6 billion of pension obligations at United, the largest default in U.S. history. United's underfunding is nearly $10 billion.

In trouble are traditional defined-benefit plans -- a fading fixture of old economy companies that depend on corporate contributions and offer a fixed monthly payment regardless of how the funds perform financially.

PBGC Executive Director Bradley Belt told senators that current law allowed United to go for years without contributing to its pension plans or paying extra premiums to the agency.

Glenn Tilton, United's chief executive, said terminating pensions was necessary for the airline's survival. ``Without success for the enterprise, the rest is academic,'' he said.

Overhaul of Pension - Funding Rules Sought - New York Times

WASHINGTON (AP) -- Fearing that airlines and other struggling industries could present the country with its next S&L crisis, Congress and the White House are pushing an overhaul of pension-funding rules that has been overshadowed by Social Security.

The heads of three major airlines were called to appear Tuesday before the Senate Finance Committee. Its leaders are alarmed that the Pension Benefit Guaranty Corp. -- the federal agency that insures private pension plans -- already has a $23.3 billion deficit because of defaults.

More than half of the 100 largest plans had less than their promised benefits on deposit, which the committee's chairman blames on lax rules that are supposed to guarantee full endowment.

About 34 million people -- roughly 20 percent of the nation's workforce -- expect to receive payments from their employers through defined benefit plans.

The risk those workers face was highlighted last month when a federal judge allowed United Airlines to default on $9 billion in pension obligations as it attempts to emerge from bankruptcy. The ruling shifted responsibility for paying benefits for 120,000 current and former workers to the PBGC, but the agency will pay only about two-thirds of promised benefits.

''In addition to allowing plans to book phantom investment gains, United was able to use stale, non-market interest rates to value pension liabilities, thereby further disguising funding deficits. In other words, our pension laws tell these companies, 'Take off the green eye shades and put on rose-colored glasses,''' Sen. Charles Grassley, R-Iowa, said in his opening statement.

The chairman said current law allows corporate deception similar to criminal activity alleged at Enron Corp., adding: ''The same blinders that United put on are used by companies everywhere.''

The pension funding problem recalls the savings and loan crisis of the 1980s, when hundreds of thrifts became insolvent and were taken over by the government. A congressional study in 1996 put the price tag for the S&L bailout at $480.9 billion.

In January, the Bush administration proposed an overhaul of regulations dating to the 1974 establishment of the Employee Retirement Income Security Act and the PBGC.

Among the changes favored by the White House are a boost in the PBGC premiums paid by employers, as well as a rewrite of rules that have allowed companies to use favorable stock trends and interest rates to conceal underfunding in their plans.

Similar legislation is being drafted in the House by Rep. John Boehner, R-Ohio, who serves as chairman of the House Committee on Education and the Workforce.

Airline pilots in particular are concerned that other airlines may follow United's lead if they perceive the carrier gaining a competitive advantage by dumping its pension obligation. Among those invited to testify were United Chairman Glenn Tilton; Douglas Steenland, Northwest Airlines president and chief executive; and Gerald Grinstein, chief executive of Delta Air Lines.

''Under current law, the only way an airline can avoid burdensome pension costs is by entering bankruptcy and terminating the plans,'' said Duane Woerth, president of the Air Line Pilots Association, in remarks prepared for the hearing.

''But if more and more airlines choose to shed their pension liabilities in bankruptcy, it sets up the potential for the 'domino effect,' in which all the other legacy carriers are incentivized, or even forced, to file bankruptcy, in order to achieve the same cost savings and level the playing field,'' Woerth said.

One member of the finance committee, Sen. Jim Bunning, R-Ky., complained the government was encouraging corporate mismanagement through its lax rules covering pensions. He was also critical of bailout money provided to the airlines last year that was not spent to bolster pensions but used to pay other debts.

''I want to know why we should reward lousy management,'' Bunning said, his voice rising in anger.

One of the panelists, David Walker, head of the Government Accountability Office, replied ''I don't want to reward anything. I think we have some very perverse incentives under the current system.''

Box: Senate Committee Focusing on Pensions - New York Times

PENSION PLIGHT: Congress and the White House are seeking changes in rules for funding pensions, hoping to avert a crisis reminiscent of the S&L bailout of the 1980s.

IN THE HOLE: The federal agency that insures private pension plans already has a $23.3 billion deficit because of defaults. More than half of the 100 largest plans have less than their promised benefits on deposit.

A WIDE NET: One out of every five people in the nation's workforce expects to receive payments from an employer's defined benefit plan.

Volume of Underfunded Pensions Spikes - New York Times

WASHINGTON (AP) -- Lax reporting rules created by Congress, coupled with corporate America's eagerness to take advantage, have left millions of workers' and retirees' pension plans underfunded without their knowledge, senators were told Tuesday.

United Airlines may have set an unsavory example for others in the airline industry, Senate Finance Committee members were told during a hearing on Capitol Hill. After declaring bankruptcy in 2002, the airline won court approval last month to shed $9 billion in pension obligations -- shifting responsibility to the federal Pension Benefit Guaranty Corp.

That has contributed to a $23.3 billion deficit at the agency, which insures private pension plans, and triggered fears of another massive taxpayer bailout similar to the 1980s S&L crisis. The agency's head told senators the number of pension plans that are more than $50 million short of promised benefit levels has risen from 221 in 2000 to 1,108 in 2004. Those funds have an average of just 69 percent of promised benefits on hand.

''The law represents the floor of acceptable behavior, not the desired state,'' David Walker, head of the nonpartisan Government Accountability Office, told the committee. ''Unfortunately, when it comes to pension funding, too many high-risk companies do what is legally permissible -- rather than what is right -- when deciding how much money to put into their pension plans.''

The statistics and comments prompted calls for swift legislative action this year, adopting bills pushed by President Bush, Sen. Jay Rockefeller, D-W.Va., or Rep. John Boehner, R-Ohio. In general, the bills create schedules to eliminate the funding shortfalls and revise rules that allow companies to mask underfunding. They also provide greater transparency so that information about the funds now available only to the PBGC is shared with the general public.

''The facts are alarming. The time to act is now. Tinkering with the current rules won't do. Another temporary Band-Aid won't do,'' said Sen. Charles Grassley, the Iowa Republican who chairs the Finance Committee.

The hearing took place against the backdrop of the high-profile debate in Washington about overhauling Social Security. The federal retirement program is one-third of the so-called three-legged stool that financial planners suggest workers erect for their retirement.

The other ''legs'' are money invested by workers in 401(k), IRA or other tax-preferred investment plans, as well as corporate pension plans in which an employer typically pays a defined benefit to a worker during his retirement.

About 34 million people -- roughly 20 percent of the nation's work force -- expect to receive payments from their employers through defined benefit plans.

The risk those workers face was highlighted by the United ruling, in which the PBGC assumed responsibility for paying pensions to 120,000 current and former airline employees. While they were owed more than $9 billion in pension benefits, they will receive only about two-thirds of that amount -- $6.6 billion -- because of the agency's insurance limits.

A PBGC report released Tuesday showed that pension rules allowed United to underfund its plan without notifying its employees, paying extra insurance premiums or accelerating its pension payments.

United Chairman Glenn Tilton, the focus of most of the day's sharp questions, said the airline was forced to seek pension relief when the government refused to grant it a $1.1 billion loan guarantee. While conceding the ruling has caused employee pain, he added: ''From the outset of the bankruptcy process, our mission has been to enable United Airlines to succeed as an enterprise. Without success for the enterprise, the rest is an academic exercise.''

Two other airline executives, Douglas Steenland, president of Northwest Airlines, and Gerald Grinstein, chief executive officer of Delta Air Lines, lobbied for the bill sponsored jointly by Rockefeller and Sen. Johnny Isakson, R-Ga.

''In short, the current funding rules are too volatile, unpredictable, inflexible and too expensive for our company to survive and compete in the modern, deregulated airline industry that demands we deliver service to our customers at a competitive price,'' Steenland said.

That testimony was challenged by airline machinists and flight attendants who testified at the hearing, as well as Sen. Jim Bunning, R-Ky., a committee member with 8,000 constituents who work for Delta. He was critical of bailout money provided to the airlines last year that was not spent to bolster pensions but used to pay other debts.

''I want to know why we should reward lousy management,'' Bunning said, his voice rising in anger.

Walker, the Government Accountability official, replied: ''I don't want to reward anything. I think we have some very perverse incentives under the current system.''

On the Net:

Pension Benefit Guaranty Corp: http://www.pbgc.gov/news/press--releases/2005/pr05--48.htm

Senate Finance Committee: http://finance.senate.gov/sitepages/hearing060705.htm

Pension Loopholes Helped United Hide Troubles - New York Times

Loopholes in the federal pension law allowed United Airlines to treat its pension fund as solid for years, when in fact it was dangerously weakening, according to a new analysis by the agency that guarantees pensions. That analysis is scheduled to be presented at a Senate Finance Committee hearing today.

A second report, by the comptroller general, found that most companies that operate pension funds are using the same loopholes. Those loopholes give companies ways - all perfectly legal - to make their pension plans look healthier than they really are, reducing the amount of money the companies must contribute.

United's pension fund failure is now the biggest since the government began guaranteeing pensions 30 years ago. Most companies are able to keep their pension plans going, despite the chronic, hidden weakness, because they are generating enough cash to meet their obligations to current retirees. Only when a company files for bankruptcy, as United did in December 2002, and terminates its pension plan, as United has, does the government step in and make the plan's true economic condition apparent.

"We saw similar practices and events at Enron, but unfortunately, this time it's perfectly legal," said Senator Charles E. Grassley, the Iowa Republican who is chairman of the finance committee. He said he had scheduled today's hearing because he wanted to find ways to keep pension disasters like the $10 billion failure at United from happening at other companies.

"The rules are full of serious holes that need to be fixed as soon as possible," Senator Grassley said. "No one should make the mistake that this is an airline-only problem. The reality is that companies everywhere have used the same arcane pension-funding rules" to shrink their contributions.

Many analysts believe that the federal Pension Benefit Guaranty Corporation will one day require a bailout because it has been forced to pick up a number of large failed private pension plans. The more big defaults there are in the meantime, the more the eventual bailout will cost.

The federal pension law was enacted in 1974 after a number of scandals in which companies went bankrupt and their workers discovered there was little or nothing set aside to pay the pensions they had been promised. The law was supposed to make pension failures a thing of the past by requiring companies to set aside money in advance - enough each year to pay the benefits the work force earned that year.

The law also required that if a pension fund got into trouble, its sponsor was to quickly pump in more money, warn its employees about the problem and pay higher premiums to the federal pension insurance program.

United did none of those things, even as its pension fund withered, because its calculations were making the fund look healthy. The fund is made up of four individual plans for various groups of employees.

United's calculations followed the letter of the law until July 2004, when the airline announced that it owed $72.4 million to its pension fund but would not make the contribution. By that time, the company had filed for bankruptcy protection.

The $72.4 million would have done little good by then, because the pension guaranty agency told the bankruptcy court that the pension fund had a shortfall of $8.3 billion.

In its analysis, the Pension Benefit Guaranty Corporation found that in 2002, when United was determining how much it had to contribute to its four plans, it calculated that the plans for its pilots and its mechanics each had more money than needed. It further calculated that the plans for its flight attendants and its managerial workers were close to being fully funded, and did not need any special attention.

On the basis of those calculations, United, a unit of the UAL Corporation, made no pension contributions that year.

Those numbers are on file with the Labor Department. But they do not square with the pension numbers United provided to the Securities and Exchange Commission. That agency requires companies to calculate pension values in a different way. At United, that method showed the four pension plans to be only 50 percent funded; that is, they had only half as much money as they needed to make good on United's promises to its workers.

Pension calculations done for S.E.C. filings have nothing to do with the rules for calculating contributions. But had United been required to use the S.E.C. pension numbers to determine its contribution that year, it would have had to pump money into the plans quickly. The pension law requires companies to make special catch-up contributions any time their pension funds fall below an 80 percent funded level, or even when they fall below 90 percent funded, if they stay at those levels for several years. A plan that was only 50 percent funded would be considered a real emergency.

But the law allowed United to say its pension plans were fully funded, or nearly so, and, therefore, no more money was needed. United's employees were not informed that anything was amiss, as the law requires of badly weakened plans. Nor did United have to pay the higher premiums to the pension guaranty agency that the law expects.

The discrepancy between a company's pension report to the S.E.C. and the Labor Department is but one example of the problems. At today's Senate hearing, David M. Walker, the comptroller general, is expected to testify that companies have so many ways of tweaking their pension calculations that they almost never have to make the special catch-up contributions that Congress required of plans that are slipping.

A recent study by the Government Accountability Office, which Mr. Walker runs, examined eight years of records for the nation's 100 largest pension funds, and found that only six plans in the entire group ever had to pay the special contributions in that period.

For two of the plans, it was already too late by the time the special contributions came due. Years of insufficient contributions had taken their toll, and those plans collapsed and were taken over by the government.

The G.A.O. study attributes some of the misleading pension math to the use of inappropriate actuarial assumptions in projections and some to a process called "smoothing," in which actuaries attempt to eliminate short-term volatility by spreading changes over several years.

But the pension agency's analysis of United's case shows that the rules for tracking contributions made in prior years have also caused a great deal of trouble. The rules allow companies that put in more than the required minimum in any given year to keep the excess amount on their books and to use it to offset their required contributions in years when cash is tight.

These excess contributions from the past are kept in a running tab called a credit balance.

The trouble is that at United, as at many companies, money contributed in the 1990's was invested in assets that lost value during the bear market that began in 2000. But the pension rules allow companies not only to keep their pension credit balances on the books at the original amount, but they are even permitted to allow their credit balances to compound in value at some interest rate determined by the plan's actuary.

When United's calculations finally began to show that contributions were quickly needed, in 2003, the airline was able to satisfy the requirement with just a small amount of cash and lots of bookkeeping entries from its credit balance.

Senator Grassley said he believed many companies were "booking phony investment gains to hide that workers' pensions are going down the tubes."

He said he hoped the hearing would lead to legislation that would eliminate the loopholes that made such maneuvers possible.

In a later session today, the finance committee is scheduled to hear from executives of some of the major airlines, and from the leaders of some of the unions for airline employees.

The Mobility Myth - New York Times

The war that nobody talks about - the overwhelmingly one-sided class war - is being waged all across America. Guess who's winning.

A recent front-page article in The Los Angeles Times showed that teenagers are faring poorly in a tight job market because of the fierce competition they're getting from older workers and immigrants for entry-level positions.

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More Columns by Bob Herbert On the same day, in the business section, the paper reported that the chief executives at California's largest 100 companies took home a collective $1.1 billion in 2004, an increase of nearly 20 percent over the previous year. The paper contrasted that with the 2.9 percent raise that the average California worker saw last year.

The gap between the rich and everybody else in this country is fast becoming an unbridgeable chasm. David Cay Johnston, in the latest installment of the New York Times series "Class Matters," wrote, "It's no secret that the gap between the rich and the poor has been growing, but the extent to which the richest are leaving everybody else behind is not widely known."

Consider, for example, two separate eras in the lifetime of the baby-boom generation. For every additional dollar earned by the bottom 90 percent of the population between 1950 and 1970, those in the top 0.01 percent earned an additional $162. That gap has since skyrocketed. For every additional dollar earned by the bottom 90 percent between 1990 and 2002, Mr. Johnston wrote, each taxpayer in that top bracket brought in an extra $18,000.

It's like chasing a speedboat with a rowboat.

Put the myth of the American Dream aside. The bottom line is that it's becoming increasingly difficult for working Americans to move up in class. The rich are freezing nearly everybody else in place, and sprinting off with the nation's bounty.

Economic mobility in the United States - the extent to which individuals and families move from one social class to another - is no higher than in Britain or France, and lower than in some Scandinavian countries. Maybe we should be studying the Scandinavian dream.

As far as the Bush administration is concerned, the gap between the rich and the rest of us is not growing fast enough. An analysis by The Times showed the following:

"Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000. Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000."

The social dislocations resulting from this war that nobody mentions have been under way for some time. But the Bush economic policies have accelerated the consequences and intensified the pain.

A big problem, of course, is that American workers have been hurting badly for years. Revolutionary improvements in technology, increasingly globalized trade, the competition of low-wage workers overseas and increased immigration here at home, the decline of manufacturing, the weakening of the labor movement, outsourcing and numerous other factors have left American workers with very little leverage to use against employers.

Many in the middle class are mortgaged to the hilt, maxed out on credit cards and fearful to the point of trembling that all they've worked for might vanish in a downsized minute.

The privileged classes, with the Bush administration's iron cloak of protection, avoid their fair share of taxes, are reluctant to pay an honest dollar for an honest day's work (the federal minimum wage is still a scandalous $5.15 an hour), refuse to fight in their nation's wars, and laugh all the way to their yachts.

The American dream was about expanding opportunities and widely shared prosperity. Now we have older people and college grads replacing people near the bottom in jobs that offer low pay, no pensions, no health insurance and no vacations.

A fellow named Mark McClellan, who was bounced out of a management position when Kaiser Aluminum closed down in Spokane, Wash., told The Times in the "Class Matters" series: "I may look middle class. But I'm not. My boat is sinking fast."

Some Big Companies Failed to Add to Pensions in 1990's - New York Times

More than half of the nation's biggest companies with pension plans sailed through the boom of the late 1990's and the bear market that followed without putting any cash into their pension funds, using loopholes in federal law to skirt a requirement for annual contributions, according to a new study by the investigative arm of Congress.

The study, issued yesterday by the Government Accountability Office, examined weaknesses in the federal pension rules in an effort to prevent cataclysmic failures like the one at United Airlines. United, which sponsors four large pension plans for its employees, followed the letter of the pension law, records at the Labor Department show, but the airline still ended up with a $10 billion shortfall in its plans.

Those plans are now expected to be taken over by the Pension Benefit Guaranty Corporation, the federal agency that insures pensions. It would be the biggest pension failure since the government began insuring pensions in 1974. The default at United has raised questions about whether other airlines will be able to keep their own pension plans going, and whether the pension guarantor will one day have to be bailed out by the taxpayers.

The G.A.O. noted that when Congress enacted the pension law 30 years ago, it expected companies to create pension funds and, at the very least, make yearly contributions equal to the amount of benefits their workers had earned for that year. There were also special rules for catching up quickly if the trust funds fell too far behind.

But underlying that general principle were details that gave companies a good deal of latitude in measuring the value of their pension promises. And in the years that followed, the law has been amended several times, making it possible for a company and its actuaries to disguise the true economic condition of a pension fund without violating the law. The G.A.O. described several of these methods, including the use of inaccurate assumptions and the practice of keeping prior-year contributions on the books at original value, even after market losses have wiped them out.

The investigators found that most companies let their pension contributions lapse to some degree, even in good years. Every year from 1995 to 2002, they said, about four plans in 10 were less than fully funded. The weaker a company happened to be, the investigators found, the likelier it was to be operating a pension fund that was also weak and to be calculating its pension values in a way that would "depict plan funding in a more optimistic light."

"These plans have the potential to create additional financial exposure and thus risk to the P.B.G.C.," the investigators wrote, referring to the Pension Benefit Guaranty Corporation. That agency has developed financial troubles in the past few years, following the failure of a number of big pension plans.

Bradley D. Belt, the executive director of the P.B.G.C., said that he was pleased that the Congressional investigators had identified some of the same problems he was concerned about.

"The G.A.O. report confirms what we have been saying all along," Mr. Belt said in a statement. "The rules must be changed to ensure that companies keep the pension promises they have made to their workers."

The Bush administration has been calling for a thorough overhaul of the pension funding rules since last January. But changes on such a broad scale would have to be enacted by Congress, and Congress has so far been occupied with other issues.

Large companies with pension funds have lobbied against the administration's pension proposals. They say it would be difficult to offer pensions at all without the flexibility now built into the pension law.

The G.A.O. based its study on the 100 largest corporate pension plans in each year from 1995 through 2002. Some plans in the study have failed since then, including those at Bethlehem Steel and LTV Steel. Others have been terminated by their corporate sponsors, or have been split up and reconfigured in corporate mergers and spinoffs.

The G.A.O. did not identify any of the corporate sponsors in its report.