You'd like to think that numbers are numbers and math is math. But you'd be wrong. Today's example is the way two financially troubled institutions -- bankrupt Delta Air Lines and the deficit-ridden federal government -- use overly optimistic numbers that seriously mislead people.
But relax. Rather than delivering my customary rant about bad numbers leading to bad decisions -- they do, of course -- I'd like to focus on two simple solutions. One is mine, the other is a bipartisan proposal by Sens. George Voinovich (R-Ohio) and Kent Conrad (D-N.D.) to clean up federal budget math and stop the Treasury from looting the Social Security trust fund.
We'll start with Delta, which told the Securities and Exchange Commission in August that its pension funds were $5.2 billion underwater. When Delta went Chapter 11 this month, however, the federal agency that insures pensions said the deficit was more than twice as large: $10.6 billion. That difference will come out of the hide of Delta's employees and creditors, who will get far less than if the pension obligation were only $5.2 billion. (Forget Delta shareholders; they're toast either way.)
Delta's filing -- its second-quarter financial report -- treated its pension funds as if they would stay in business forever. But by the time the document was filed, it was obvious that Delta was likely to dump its pension problems onto the federal government (and Delta employees) by terminating its pension funds.
The U.S. Pension Benefit Guaranty Corp., by contrast, assumes the funds will go out of business -- call it termination math. In contrast to Delta's standard (and perfectly legal) pension math, the PBGC calculates how much an insurance company would charge for annuities to pay the pension benefits Delta has promised. That number is $17.5 billion, whereas Delta calculates the benefits were worth $12.1 billion.
You can defend either calculation -- but Delta's is clearly insufficient once you realize its pension funds are going to be terminated.
Here's the solution. Delta and other companies with sizable pension fund shortfalls are required to tell the PBGC what it would cost to terminate their plans. But the firms don't have to disclose this number to the public, and the PBGC isn't allowed to unless there's a lawsuit or a congressional request. So let's require companies that have a serious chance of having their pension plans terminated to tell the public what they tell the PBGC, and allow the PBGC to make the numbers public. (I'll leave it to the lawyers among us to define "a serious chance.")
Disclosure -- which Delta could have done, but chose not to -- wouldn't solve the problem of underfunded pension plans. But people affected by the shortfall would have the information they need to make informed decisions.
Then, we've got the feds. When the current fiscal year ends this Friday, most people will be talking about a budget deficit in the $340 billion range. But Voinovich and Conrad will be talking about a deficit of more than half a trillion dollars. And they'll be right.
It's all about Social Security, whose temporary surpluses make the overall budget deficit look much smaller than it is. That's because Social Security's cash surplus (about $70 billion a year) offsets the deficit, and the interest the Treasury pays on Social Security trust fund securities ($100 billion) counts as income for Social Security but not as an expense for the Treasury.
Enter the Truth in Budgeting Act that Voinovich and Conrad introduced last week. It would require Social Security to start investing its surpluses in corporate bonds rather than continuing to buy useless Treasury securities. (The Treasurys are useless because the government will have to redeem them out of current revenue -- so the government isn't actually setting assets aside for the future.)
In addition, both senators say they'd require the Treasury to pay cash interest on the trust fund's IOUs, rather than continuing to pay interest by issuing additional securities to the fund. Those cash interest payments would also be invested in corporate bonds.
This would save Social Security's temporary surpluses for future use and stop them from reducing the stated budget deficit. "If people saw how big the deficit really is, they'd feel more of a need to do something about it," Conrad told me last week.
Truth-in-pension and truth-in-budgeting rules would be a great first step in replacing phony numbers with real numbers. You'd still have to figure out what the numbers mean -- but at least you'd know what they are. Knowledge, as they say, is power. Even when it comes to math.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.
Sen. George Voinovich (R-Ohio)
Sen. Kent Conrad (D-N.D.)