Taking Stock / Seven pension myths
Let's explore some of the claims that accompanied the treasury's plans to gradually stop issuing special bonds to the pension funds, thereby letting them loose onto the capital markets.
1. It will save the Tel Aviv Stock Exchange.
No. Stopping treasury issues of designated bonds for pension funds is indeed the first major step toward reforming Israel's capital market, but it won't save the TASE. The biggest problem the exchange faces is the same one the entire marketplace faces: the gigantic national debt and government deficit.
As long as the government continues to run massive deficits that inflate the national debt, the capital market will continue to be effectively nationalized, even if pension funds start investing. Huge deficits demand tremendous bond offerings by the government, which shove the private sector into the wings.
2. When pension funds stop getting designated bonds, they'll turn to the TASE and raise action a level.
Not necessarily. Stocks aren't the main alternative to designated bonds. The main alternative is negotiable government bonds. Huge budget deficits dictate high interest rates that severely reduce the motivation for pension funds to undertake the risk of corporate paper or stocks, when they can get high-interest government notes.
Even when the rates on government notes drops, Tel Aviv stocks still won't be the choice substitute. The liberalization of the capital market freed the pension and other institutionals to invest in international markets.
3. Allowing the pension funds to invest abroad is to invite disaster. They'll export their money from Israel.
No, that's an obsolete opinion long abandoned by most economists. Allowing the pension funds to invest in international markets or in Tel Aviv stocks, instead of forcing them to put everything into government bonds, will force the government to adopt responsible economic policies. That's because the government will have to compete with the business sector and with the international markets over the pension funds' money.
4. Allowing the pension funds to invest on the stock market is irresponsible. Markets crash.
Investing in the open market can be done irresponsibly, as happened in Israel in the early 1990s, and in the late 1990s on Wall Street. But it can also be done responsibly and professionally.
Remember that all the Histadrut-run pension funds were reduced to bankruptcy even though they received those designated bonds, and hardly invested a cent on the stock market. That vaunted "security" the Histadrut funds boast is smoke and mirrors: Inevitably, their pension terms will have to be retroactively degraded.
5. Allowing the pension funds to invest in stocks will promote privatization, Netanyahu-style.
Not true: As long as the government maintains tremendous deficits, there will be no new sources on the capital market. The only change - and blessed it is - is that the pension funds, and other institutionals, will stream their money to negotiable bonds instead of designated ones. Demand for shares in state-owned companies will only be generated through reducing the deficit and restoring economic growth.
6. Routing pension money to stocks will improve yields because, in the long run, stocks yield more.
Not certain at all, unless all the pension fund managers are replaced and the funds are detached from the Histadrut management. Granting Histadrut Chairman Amir Perez's henchmen the opportunity to invest in shares is highly dangerous.
The entire pension system in Israel, including the provident funds, needs to undergo fundamental reform allowing money managers to act without conflict of interest, and enabling insurees to shift their custom between funds and insurance companies quickly and without fines - because only a combination of supervision with competitiveness could improve the quality of management, and fund performance.
7. In the long run, stocks yield more than shares.
Not necessarily. In the long run, amateurish investment in stocks can yield profits for the publicly traded companies, the controlling shareholders, the brokers and the other coupon cutters on the market. American pension fund members have lost trillions of dollars in recent years while managers and corporate executives waxed fat. The only thing you can say about the long run is that professional, responsible management can generate profit over time.