In recent years there has been much alarmist talk of the impending bankruptcy of Social Security, but it is in the private sector that real dangers of default now loom. Social Security is safe through 2041 or longer, but the pension fund crisis is already squeezing corporate budgets, with disastrous consequences for jobs. If nothing is done, this pension-and-jobs crunch will intensify over the next two years.

While many CEOs sold at the top of the market, the pension funds and holders of 401(k)s were left with depreciating paper. Swooning stock markets have caused the major pension funds to lose 40 percent or more of their value since March 2000. Even the well-stuffed 401(k) has become a 201(k).

Pension funding has become so central to today’s capitalism that these developments menace the financial good health of corporate giants as well as individual retirees. Most reports on the crisis have, understandably, focused on the plight of the 42 million Americans who have 401(k)s or the equivalent. But the impact on corporate pension schemes, on which a similar number of people depend, has been just as bad. Many businesses must now forgo investment or face bankruptcy because they cannot meet their pension obligations.

In a “defined benefit” scheme (DB) the employer guarantees a pension calculated as a proportion of salary; this can be an onerous obligation for a company with many former employees. In a “defined contribution” scheme (DC), like the 401(k), only the contributions are defined, so benefits rise and fall with the market. Public-sector DB schemes are generally well and cheaply run, and are anyway guaranteed by state or federal authorities. But balanced-budget rules often force those authorities to meet pension underfunding by cutting other programs. Most large private schemes are now badly underfunded, their asset values depleted by stock declines and too many past-contribution holidays. We know this courtesy of recent reports from analysts at Merrill Lynch and UBS Warburg. Adrian Redlich of Merrill has undertaken massive research into the 348 companies in the Standard & Poor’s 500 with a DB scheme. He warned in November that these schemes would end the year with a pension shortfall of $300 billion, and this is still the best estimate. If underfunded nonpension benefits are included, an even scarier deficit looms.

The pension crunch is not simply a result of CEO misbehavior; it’s also rooted in a flawed structure that aggravates the boom-and-bust cycle. During a boom, the pension fund soars and no contributions are needed to maintain fund solvency. But when times are bad and the employer faces cash ebb, the actuaries insist there must be more dough on the table. Companies hide the unpleasant truth by fancy accounting. When they can no longer do this, they cut investment programs. This financing regime is dangerously pro-cyclical–that is, it encourages booms and aggravates recessions.

Many DB pension funds today are as large as, or even larger than, the sponsoring company, so any shortfall in the fund can have devastating effects on the bottom line. In older corporations like GM and Boeing, the pension fund is worth much more than the company. Investors who buy stock in an auto or airline concern find that they have purchased a clumsy hybrid, with pension-fund swings eclipsing the performance of the parent company. This is a big problem for employees, too. If a company or its pension scheme is in trouble, as has been the case with so many US steelmakers, the unions will often condone underfunding, reckoning that it’s better to risk members’ pensions than put them out of a job.

To make underfunding less visible, most companies continue to project annual returns to their investments of 9 percent or more.But after three years of negative returns, and in the wake of the Enron debacle, most accountants are reluctant to sign off on this make-believe world. More realistic projections have to be made, and weak earnings will, as a result, be wiped out by pension-fund losses. Standard & Poor’s has pointed out that earnings reported last June need to be deflated by 30 percent, most of it to take account of what the Financial Times described as pension “skeletons in the cupboard.”

When corporations do acknowledge the underfunding, their finances are wrecked by what accountants call the projected benefit obligation (PBO). According to the Merrill Lynch study, companies with off-balance-sheet pension liabilities exceeding their equity at the close of 2002 included Campbell Soup, Maytag, Lucent, General Motors, Ford, Goodyear, Boeing, US Steel and Colgate Palmolive. Pressured by pension deficits, IBM reduced its head count by 15,000 last year, while Lucent has shed 100,000 workers over three years. In early January GM, which has 190,000 employees and 455,000 retirees, announced that its pension costs would triple this year, to $3 billion, because three years of poor returns have hammered its pension fund.

But surely corporations are insured against pension shortfall? Hardly. In 1974 Congress set up the Pension Benefit Guaranty Corporation, but its resources have already been overstretched bailing out steelworkers’ funds. The 2001 PBGC report stated that it had a net surplus of $7.7 billion, $2 billion lower than in the previous year. Its resources were further depleted during 2002. At a time when underfunding is approaching $300 billion, the PBGC is almost broke itself.

Legally, companies cannot just walk away from pension deficits. A bankrupt DB fund means a bankrupt company, since the latter is responsible for the former. Keen to avoid Chapter 11, CEOs will ax staff and investment instead, possibly dealing the “jobless recovery” a fatal blow. Sacking workers reduces future DB pension liabilities, since the PBO of an employed worker takes into account future raises due to seniority and inflation, while the “accumulated benefit obligation” of a downsized worker does not. It may be readily grasped that DB calculations can massacre jobs; indeed, they were partly responsible for the downsizing orgy of the early 1990s.

You may think even the Bush Administration would not allow this to happen again. But before looking at what might be done to solve the problem, let’s consider the plight of other retirement funds. The DC plans, especially 401(k)s, are suffering from declining employer contributions as well as depressed markets. And companies often contribute with their own shares, subject to lengthy vesting rules, thus concentrating rather than diversifying employee risks. If a double-dip recession follows, this will cruelly expose the mockery of 401(k)s as a retirement device, since many people will be obliged to draw down savings to pay for the costs of losing a job.

Under current law, plan participants have little or no control over pensions established in their name. The law insists that pension fund trustees must conform to the norms of the “prudent expert,” but the law defines expertise and prudence as simply whatever passes for standard practice in the financial services industry. So the trustees of occupational schemes and 401(k)s are both bound into the practices of Wall Street and only rarely consult their own policyholders and beneficiaries. During the bubble, most of them retained fund managers who saw no problem with the stock-option orgy and who often allowed their clients’ money to be invested in such dubious products as Enron debt.

Addressing a conference of pension-fund managers last September, New York Attorney General Eliot Spitzer said they had the power to take on corporate greed and financial chicanery, if only they would use it. “You are the trillion-ton gorilla,” he told them. “Use your investment muscle to challenge Wall Street malpractice and corporate wrongdoing.” Spitzer may well be right that the corporate accountability deficit is now so bad that pension-fund trustees could jettison their customary timidity and get away with more aggressive activism aimed at combating executive greed and corporate irresponsibility. The California public employees’ fund, CalPERS, has tentatively moved in this direction. But new powers–and new resources–are needed too.

New laws could enhance the rights of those in pension plans, but last year’s House and Senate approaches to reform of DC schemes offered the wounded patient a Band-Aid, when what is needed is a blood transfusion. The House bill was quite gentle on corporations. It reduced the time employees have to wait before their pension holdings are vested, but it allowed employers to continue contributing to 401(k)s with matching company stock. Ted Kennedy’s Senate proposal limited the amount of their own stock employers can contribute and gives employees more say in how their retirement fund is invested. But Kennedy didn’t propose obliging employers to offer a contribution. More robust proposals are not yet in sight.

In addition to reliable regulatory structures, more resources are needed. The pension-jobs squeeze has only just begun. For individuals its reality has been softened thus far by house price inflation and earnings that continue to rise slowly. But while many investors prefer not to know about it, the goosing of the DB pension numbers by unreal assumptions could well prove as dangerous to economic health as the Japanese banks’ huge inventory of nonperforming loans. Will the Bush Administration stand by and do nothing as this time bomb ticks away?

If the Administration simply wished to help the corporations out of a tight spot, they could be legally released from their obligations to retirees. This would allow them to resume investing. But it would be grossly unfair and provocative. Another solution might be to pump money into the PBGC. But to use taxpayers’ money to bail out pension funds in the current deflationary situation would be a dangerous exercise. And the PBGC arrives on the scene too late anyway: It only kicks in once Chapter 11 is staring a company in the face. The DB funds might be rescued by imposing on employees compulsory additional contributions. But this would weaken demand and could spark a firestorm of resentment. The most likely outcome is one that would allow employers to convert DB schemes to a DC logic, using “cash balance” or some kindred formula, but shortchanging employees in this way would create legal as well as political difficulties.

A determined plan could address the pension crisis before it gets any worse. Corporations should be obliged to make up for their past and present derelictions by replenishing their employees’ retirement funds. However, simply forcing employers to contribute cash to every worker’s pot or company scheme is not the answer. Opponents would rightly warn that this would raise labor costs, drain cash flow, undercut investment and reduce demand. Applied anytime soon, it would mug an ailing economy and send unemployment skyrocketing. It would aggravate, not solve, the pension crisis.

There is one approach that would shore up depleted savings without threatening a shaky economy: The funding gaps could be plugged by obliging all corporations to issue new stock or bonds each year equivalent to, say, 10 percent of their profits. This share levy, or stakeholder premium, would be calculated like a corporate tax, but unlike such a tax, it would not be a deduction from cash flow, nor would it be passed on to consumers. And unlike payroll taxes, it would not add to labor costs, thus giving no reason to lay off workers.

The shares raised by this levy could be used to meet the retirement problems of all kinds of pension funds–indeed, all citizens, whether they have a plan or not. A portion of the proceeds of the levy, somewhere between a quarter and a third, could be used to top up the assets of the many underfunded corporate schemes and replenish the assets of the PBGC (in fact, the PBGC could take over responsibility for running the remaining DB schemes). The remainder of the shares raised could be placed in a special trust fund that would enable Social Security to pay a second pension to all. Some portion of the donated shares could be used to encourage savings by offering to match it dollar for dollar. But priority should be given to insuring that caregivers, low-paid workers and the unemployed receive a second pension.

A great advantage of the share levy is that unlike an ordinary tax, it would not exacerbate the problems of an economy threatened by recession. The issuing of new shares does not oblige companies to pay out more in dividends–it simply adds to those who will receive such dividends in the future. The levy should be calibrated to insure that all retirement funds gain more than they lose. While it would act in some respects like a wealth tax, it would not take demand out of the economy. And its revenues and payments could be adjusted to moderate the swings of the business cycle.

The shares raised by the levy would be peculiar in one respect: They could not be sold for five years or longer but would be kept to generate income or investment for retirees. The Social Security Administration could channel the resources it receives to a network of trust funds in each state. Those trust funds could be encouraged to use their voting power as shareholders to promote good corporate governance, and surplus income could be reinvested to help defray the looming costs of an aging society. Some of it could also be put into “socially responsible investing.” But above all, the share levy device would be accumulating resources for the future, when they will be needed, as well as averting the current corporate finance crisis.Addressing another problem, the trust funds could sponsor genuinely independent research into the stock market, which would be made available to all.

Of course, opponents might say this is wildly impractical. But it so happens that the Swedish government ran a share levy between 1983 and 1991 based on the ideas of labor economist Rudolf Meidner. It raised large sums, and was only dropped for ideological reasons by an incoming conservative government. OK, the critics might reply, that’s even worse; you can do it but it’s outrageous. It’s an attack on property and the right of boards to run their own businesses. In fact, it’s an attack on capitalism.

Actually, the proposal is more modest than this. It’s simply a financing device, a way of boosting retirement funds and promoting better corporate behavior. While it would eventually expose CEOs to professional scrutiny from independent trust funds, the issuing of new shares would work just like the issuing of stocks as matching funds, as in the corporate-friendly pension reform proposed by Republicans. (Historical note: The idea of a share levy is American in origin, its first known advocate being Republican Congressman Schuyler Colfax, who urged that it would neatly complement his other 1862 proposal–an income tax.)

The imperious CEOs would not like to see their wings clipped, but they would have to be grateful for the rescue of their waterlogged pension funds. And a measure that restores savings without encouraging unemployment should be widely welcomed. When Bush is forced to address the problem he will probably lean toward benefit-slashing. And he will claim–falsely–that there is no alternative.