Readers may recall that Bill Clinton planned to privatize Social Security in the second term of his Presidency. The Monica Lewinsky scandal derailed his plan.
As the Clintons knew, only a Democrat can dismantle Social Security. Hillary looks to be picking up where Bill left off. As David Sirota describes in a must-read story, Hillary is planning to introduce mandatory retirement accounts, a scheme that Hillary has mentioned in high concept form earlier. As details emerge, this “enrich Wall Street at the expense of everyone else” program is even more attractive to pet Democratic party constituencies than the 1.0 version of going after Social Security directly. No one in the Clinton or George W. Bush administration was so audacious as to cut in private equity and hedge funds in the way this variant would.
But Hillary, and her major advisor on the plan who is also on her short list of Treasury Secretary candidates, Blackstone CEO Tony James, are too adept to label these required savings accounts as a stealth replacement for Social Security. The plan, as described in Sirota’s article parallels the way the contributions are made now to Social Security, with both employers and employees required to put aside a percentage of payroll…but not in the form of Social Security taxes, but in individual retirement accounts that in turn are put in “pooled plans run by professional managers.”
If you look at James’ speech, what he is proposing sounds innocuous, a supposed additional 3% of worker savings. But that is a nearly 25% increase over what workers are paying into Social Security now. Moreover, most experts agree that to the extent that Social Security needs fixing (30 forecasts are fraught), some not very onerous tweaks would do the trick. First and foremost would be to eliminate the payroll tax ceiling.
It’s not hard to see the long-term game plan. Social Security will be cut due to purported need to keep the budget balanced while funding bombing runs in the Middle East. It will be turned from a universal social safety net more and more into a welfare program. That in turn makes it easier to make more cuts, since its core supporters will be further and further down the food chain.
Moreover, the canard is the assumption that James makes: “…if these savings are invested correctly and earn a good return for the retiree.” Tell me how this happens in a world of ZIRP, NIRP, low growth, high private debt levels, and equity prices increasingly dependent on unsustainable stock buybacks?
There are fundamental problems with “saving and investing” for retirement as a mass solution, as opposed to for a relatively small group of high income individuals. One is that everyone’s financial asset is someone else’s financial liability. Expecting a return over the long-term GDP growth level on average isn’t attainable as the pool of financial claims keeps rising. That’s why, as Michael Hudson keeps pointing out, debt jubilees were a regular part of ancient civilization. The burden of outstanding claims became economically destructive and socially destabilizing. And as Keynes and others have pointed out in the more modern formulation, high savings rates produce the paradox of thrift: what seems virtuous on an individual level is destructive on a societal level.
In fact, rather than more savings, what the US needs is higher worker incomes, which in turn would support more spending, more job creation, and more investment. Ultimately, the cost of supporting non-working members of society is a function of the size of the economy in the future, as in the quality of infrastructure, how many people are employed productively, the utility of inventions in the intervening decades (as in advances that lower the cost of treating cancer have vastly greater positive societal spill-overs than apps that generate the same amount of GDP). That is why having the Federal government be obligated to provide a retirement social safety net aligns incentives much better: the authorities should be concerned about how to produce long-term growth for the economy, not just get through the next quarter, um election. But neoliberalism remains dominant despite its abject failure here and in Europe, so policy-makers are still relying on the economic equivalent of snake oil.
And despite the smooth talk, let’s underscore the point: even if you buy into the false narrative that Social Security needs to come out of individual contributions, when it is in fact a pay as you go system, a 3% increase in employee contributions across the board now is well beyond what anyone is calling for in the way of fixes.
Put it another way: this is just another form of looting. Obamacare was written by the health insurance lobby and look how well that has turned out. Just imagine what sort of cooking ordinary Americans will get from the kitchen of Tony James and his fellow private equity robber barons. From Sirota’s story:
The proposal would require workers and employers to put a percentage of payroll into individual retirement accounts “to be invested well in pooled plans run by professional investment managers,” as James put it. In other words, individual voluntary 401(k)s would be replaced by a single national system, and much of the mandated savings would flow to Wall Street, where companies like Blackstone could earn big fees off the assets. And because of a gap in federal anti-corruption rules, there would be little to prevent the biggest investment contracts from being awarded to the biggest presidential campaign donors.
In other words, this is the worst of all possible worlds. You have an individual account, but you are not permitted to invest in stocks and bonds; you may not be permitted even to choose your asset allocation. Worse, James’ language suggests that the vehicles will be “run by professional asset managers,” as in many or perhaps all will be actively managed, as opposed to indexes. As any student of John Bogle will tell you, paying for active managers is a waste of money, but Hillary wants to go that route on an industrial scale so as to further enrich grifters like Tony James (let us not forget that the Blackstone has paid fines in an SEC settlement for charging fees it was not authorized to take, which in most walks of life would be called embezzlement).
And of course, private equity is on the list of preferred investment. And even better: James holds up private equity as a solution, just as it supposedly is for public pension funds, even as Blackstone was one of the first private equity firms to warn that returns in the future would be paltry. Indeed, the valuations of the private equity firms that are public say that they expect none of them will be earning any carry fees over the next few years. It’s perverse to see James praise public pension funds for their high allocations to alternative investments even when he and his private equity colleagues snigger privately about their lack of sophistications.
Again from Sirota:
In the blueprint of the plan, James lamented that 401(k) systems “don’t invest in longer-term, illiquid alternatives such as hedge funds, private equity and real estate,” and said the new program could invest in “high-yielding and risk-reducing alternative asset classes.” In a CNBC interview, James said he wants the billions of dollars of new retiree savings to be invested “like pension plans.” He noted that in “the average pension plan in America, about 25 percent is invested in stuff we do, in alternatives, in real estate and private equity and commodities and hedge funds.” Unlike stock index funds and Treasury bills, those investments generate big fees for financial firms — and critics say they do not generate returns that justify the costs.
So James is looking for a way for Blackstone to unload its failed investment in single family rental homes, where it is struggling to find an exit strategy, on government-mandated investors? How sporting of him.
And as for the other supposed virtues of this scheme, let us not forget that this story appeared a day after New York’s pension overseer blasted the state comptroller for paying big fees for hedge fund underperformance, and for not knowing what private equity fees and costs were when the state has a clear duty to do so, and reason to be vigilant in light of SEC reports of widespread abuses.
And there is another layer of this that is not pretty: the more money that is in the hands of mega-funds, the less corporate accountability. CEOs can regularly pay themselves well out of line with performance and get away with other governance failings by virtue of the fact that most institutional investors either can’t be bothered to try to discipline them or have incentives not to (they want the 401 (k) or pension or Treasury funds management business). Mega-funds that are selected via a largely if not entirely political process have even less reason to push for good governance.
I hope you’ll circulate this post and/or Sirota’s story widely. This is what you can look forward to in a Clinton administration. Don’t say you weren’t warned.