On August 3, 2006, by a vote of 93 to 5, the US Senate passed the “Pension Protection Act of 2006″, already approved by the House of Representatives on July 28, 2006 and now going to President Bush to be signed into law.

This massive bill (907 pages) is a major piece of legislation that, like ERISA in the 1970s, will effect capital flows in the US market over the next generation.

Links to the full text of this law and related discussions can be found on BenefitsBlog.

A Boon For Wall Street?

The Wall Street Journal has already headlined some of the expected effects on capital flows.

In the lead editorial on August 4, 2006, “The Pension Era, R.I.P.”, the Journal announced that this law “signals the end of the old, defined-benefit pension era.”

In an article on August 7, 2006, the WSJ announced, “Pension Bill Promises Windfall for Fund Firms”, citing research by the Vanguard Group projecting an additional 5.5 million new savers in 401(k) plans.

The article also states that passage of the bill was helped along by heavy lobbying by the mutual fund industry trade organization, the Investment Company Institute. The Act allows, but does not require, automatic enrollment in 401(k) plans and permits employers to give “investment advice” to plan participants.

The Law of Unintended Consequences

History suggests that a law as complex as the Pension Protection Act of 2006 is likely to be laced with obscure provisions that will have unintended consequences.

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Federal Reserve flow of funds table F105 shows that the cost of state and local government to citizens has been steadily escalating over the last five years.

Taxes and other receipts of state and local government increased 2.7% in 2002, 5.5% in 2003, 6.2% in 2004, and 6.7% in 2005.

Most state and local government are not allowed to run a fiscal deficit and increases in expenses are passed on to citizens as higher taxes and other receipts.

The government, in calculating the Consumer Price Index, does not include the cost of increased taxes.

The rising cost of state and local government is an example of ‘hidden’ inflation. (See: Fiddling the CPI)

Federal Reserve flow of funds table F105 does not include the cost of retirement funds for government employees and therefore inflation of state and local government costs is probably greater.

(See: Consequences: Rising Home Values, Land Costs, and Pension Benefits.)