- The Washington Times - Sunday, September 7, 2003

Every group that depends heavily on its investments has had a rough time since the stock market bubble burst in 2000. But perhaps no investment class is watching the numbers with as much apprehension as our country’s seniors.

According to research released late last year by the American Association of Retired Persons (AARP), 77 percent of 50- to 70-year-old stock owners have lost money in the market since 2000. One in four saw the value of his investments drop by 25 to 50 percent and 9 percent lost more than half of their savings.

Those who are stepping into retirement — or who are several years into it already — depend on their investments in a way no other group has to; unlike Gen Xers or Baby Boomers, they can’t afford to wait 10 years to see whether their investments bounce back. Their future is upon them now, and a lot of planning has gone into making sure their worries are taken care of.

But now, just as the economy and the stock market are taking steps toward recovery, some public officials are considering mandatory expensing of stock options — a move that will have a chilling effect on stock prices and on the near future of America’s seniors.

Mandatory expensing regulation would impede prosperity by chipping away at the bottom line, as American Enterprise Institute economics scholar and financial columnist James K. Glassman explained in recent testimony on Capitol Hill.

“As a result of expensing options, many firms — among them America’s most successful and innovative — will be forced to take massive charges against earnings,” Mr. Glassman said. “Although they will not alter the firms’ cash flow or actual business prospects from what they are today without mandatory expensing of options, the reduced reported earnings are almost certain to lead to lower stock prices and a higher cost of capital for the firms.”

Many well-regarded financial experts say stock prices would likely suffer if mandatory expensing — which would discourage the creation of options plans — becomes a reality. “The general finding is that stock prices preponderantly benefit from the issue of employee options,” the economists Burton G. Malkiel and William J. Baumol wrote in a Wall Street Journal editorial.

Further, as Mr. Glassman noted in his testimony, expensing “leads accounting policy in precisely the wrong direction.” That’s because treating stock options as an expense presents a false picture. It seems to say that earnings have declined. But the reality is that stock options simply indicate the possibility that future earnings can be distributed among more shares of stock.

Why would regulators in Washington make a move that would cause companies to lose profitability as well as their amount of available capital? It is well-established that stock ownership drives up employee morale and gives companies the power to recruit and retain the best employees. Those in favor of expensing, like Securities and Exchange Commission Chairman William H. Donaldson, know this and should stand on the side of businesses and against an expensing rule that would weaken the economy.

Seniors have already had their savings and retirement plans whacked in the market. They are trying to salvage shrunken portfolios, and are in many cases having to come up with a Plan B for their new phase of life.

Some who are nearing seniorhood will have to postpone their goal retirement age. As a result of the market downturn, 20 percent of those seniors who are still working have postponed retirement; 15 percent of those already retired have either returned to work or believe they’ll have to soon, according to the AARP study.

As a class of investors, seniors are in a unique position in that they simply can’t afford for the stock market to take another hit right now. Those who want mandatory expensing of stock options are placing misguided political considerations over the immediate needs of America’s retirees.

Jim Martin is president of the 60 Plus Association, a nonpartisan seniors advocacy group.

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