Phil Gramm tried to get the state of Texas to sell bonds to buy life insurance on state employees. Not insurance to help support the employees’ families, you understand. No, that would be liberal. Insurance whose proceeds were to go to Gramm’s employer, UBS, which would use them to pay off the bonds and then share the profit with various state pension plans.
This scheme is a variant on the rather gruesome financial maneuver called “dead peasant insurance,” in which employers take out insurance policies on the lives of their low-wage employees. In the corporate version, the gimmick is partly a tax dodge based on the fact that life insurance payouts aren’t taxable while the interest on the money used to pay the premiums in the first place is generally tax deductible.
But even without the tax arbitrage, “dead peasant insurance” is a way to exploit an odd glitch in the insurance markets. When companies sell what’s called “level-premium term insurance,” the premiums in the first few years are way above the actuarially fair premiums, but as the insured ages and the premium stays fixed the later years are actually a good deal from the insured’s viewpoint. But because so many people drop their term insurance early, those who stay in to the end actually get more in payouts, on average, than they put in as premiums, even adjusting for the time-value of money.
For any individual or family, that’s merely an interesting fact; whether it makes sense to buy term life insurance is going to be determined by lots of other facts. (Though it’s obviously foolish to give up such insurance after the first few years.) But for a big employer with lots of employees, buying level-payment term life on a bunch of them and holding it for the full term is going to turn a profit (at the expense of those families with legitimate term-insurance needs and companies that need “key person” insurance on employees whose deaths would actually have a material impact on the business).
In the private sector, “dead peasant insurance” is big business: billions of dollars per year. Some states have banned it, but the rather mild scandal that erupted when word of the scheme hit the press has largely faded away. The IRS had actually managed to take away the tax benefits of the scheme, but in August 2006 the Republican-controlled Congress gave them back again.
Now, if you think in purely economic terms, dead peasant insurance isn’t especially obnoxious. Yes, it makes the insurance markets a little less attractive for people who actually need insurance, and it’s a tax dodge, but just considering the financial angle there’s nothing hideously wrong with it by Wall Street standards. That fact, plus the complexity of the scheme in terms of how it was supposed to make a profit, helped limit the size of the political fuss about the practice.
But any normal human being (i.e., anyone without an MBA or an advanced degree in economics) is going to get sick to his or her stomach at the idea of an employer gambling on the deaths of its employees. No, I don’t think that the mild incentive the schemes create for employers to keep those death rates high will have much actual effect on employer behavior (Seven-Eleven isn’t going to start encouraging robbery-murders at its stores to collect on the insurance policies of the clerks.) The issue is primarily one of principle, or if you prefer of appearances: it’s creepy when your employer wants you dead.
The fact that Phil Gramm was peddling this ghoulish scheme tells you right away you don’t want his hands anywhere near the levers of power, which is where they would be should John McCain become President. (The fact that the Republican-dominated government of Texas decided to take a pass suggests either that their morals are better than Gramm’s or that they have more political sense than he does.)
So in Phil Gramm, chief economic adviser to John McCain, we now have:
1. The Senator whose financial deregulation bill helped create the current crisis;
2. The man who cashed in on that accomplishment by becoming the vice chairman of a big Swiss bank, which until two years ago was running a tax-evasion racket for U.S. millionaires on the side;
3. The lobbyist for that bank (awash in bad mortgage-backed paper) who crafted John McCain’s non-response to the foreclosure problem; and
4. The sponsor of a scheme in which that bank and the State of Texas would gamble on the deaths of Texas schoolteachers and other public employees.
In short, Phil Gramm is the poster child for the heartless, corrupt, revolving-door Washington which John McCain has always railed against and has always exemplified. Can you say “vulnerability”? I was sure you could.