I posted Sirota's story earlier today, but I didn't understand that it is
actually a scheme to substitute private equity for social security!
Miriam
Blackstone's Tony James Touting What Looks Like Clinton's Scheme to Gut
Social Security
Thursday, 20 October 2016 00:00 By Yves Smith, Naked Capitalism | News
Analysis
Hillary Clinton speaks at a campaign event at Wayne State University in
Detroit, October 10, 2016. (Doug Mills / The New York Times)
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.
The stories at Truthout equip ordinary people with the facts and resources
to create extraordinary change. Support this vital work by making a
tax-deductible donation now!
This piece was reprinted by Truthout with permission or license. It may not
be reproduced in any form without permission or license from the source.
YVES SMITH
Yves Smith has been in and around finance for more than 30 years as an
investment banker, management consultant to financial institutions across a
large range of wholesale banking and trading markets businesses, and a
corporate finance adviser. She has also written for The New York Times, Al
Jazeera, the New Republic, Salon, the Conference Board Review, the
Australian Financial Review and other financial publications. Her TV
appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real
News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN
(Canada). Follow her on Twitter: @yvessmith.
RELATED STORIES
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By Ira Chernus, History News Network | Op-Ed
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By Elizabeth Schulte, Socialist Worker | Op-Ed
Hillary Clinton and the Church of the Sacred Fed
By Dean Baker, Truthout | Op-Ed
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Error! Hyperlink reference not valid.
Blackstone's Tony James Touting What Looks Like Clinton's Scheme to Gut
Social Security
Thursday, 20 October 2016 00:00 By Yves Smith, Naked Capitalism | News
Analysis
. font size Error! Hyperlink reference not valid.Error! Hyperlink
reference not valid.Error! Hyperlink reference not valid.Error! Hyperlink
reference not valid.
. Hillary Clinton speaks at a campaign event at Wayne State University
in Detroit, October 10, 2016. (Doug Mills / The New York Times)
. 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.
The stories at Truthout equip ordinary people with the facts and resources
to create extraordinary change. Support this vital work by making a
tax-deductible donation now!
This piece was reprinted by Truthout with permission or license. It may not
be reproduced in any form without permission or license from the source.
Yves Smith
Yves Smith has been in and around finance for more than 30 years as an
investment banker, management consultant to financial institutions across a
large range of wholesale banking and trading markets businesses, and a
corporate finance adviser. She has also written for The New York Times, Al
Jazeera, the New Republic, Salon, the Conference Board Review, the
Australian Financial Review and other financial publications. Her TV
appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real
News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN
(Canada). Follow her on Twitter: @yvessmith.
Related Stories
Social Security Cuts: More Than Money At Stake
By Ira Chernus, History News Network | Op-Ed Hillary Clinton's Not-So-New,
Not-So-Worker-Friendly Economic Plan
By Elizabeth Schulte, Socialist Worker | Op-EdHillary Clinton and the Church
of the Sacred Fed
By Dean Baker, Truthout | Op-Ed
Show Comments
