The Real Reason the Investor Class Hates Pensions
6th March 2018
Who are these sinister people, the ‘investor class’? Nothing immediately comes to mind, but they sure sound scary, don’t they?
No issue in America today better illustrates the divergent interests of working Americans and the 1 percent than pension reform. Substantial empirical evidence shows that America’s favored retirement vehicle — the 401(k), recently renounced by its own inventors — is grossly inadequate and will leave tens of millions of Americans with insufficient retirement assets. And yet states and cities are busy converting traditional pensions into these failing 401(k)s or equivalents, to the great benefit of money managers and the finance class.
Another apparent villain of the piece, this time the ‘finance class’. Who might these sinister folk be? No telling — the author certainly can’t be bothered to tell us — but, again, they sure sound scary, don’t they?
Another thing the author fails to reveal is what ‘substantial empirical evidence’ about the ‘gross inadequacy’ of the 401k might be. I guess we’re just supposed to take his word for it.
Speaking anecdotally, it was the 401k that put me on the road to having sufficient financial independence to retire when I wanted to. If that’s failure, gimme more. Of course, the 401k does demand a bit of discipline on the part of the person allegedly saving for retirement; the only difference between it and a normal brokerage account is the fact that it’s sheltered from taxes, which would seem to suggest that the ‘failure’ belongs in to the tax system rather than the vehicle itself — which I am fully prepared to believe.
Advocates of pension “reform” — which really means cutting or eliminating traditional pension funds — will tell you that such funds are a big drain on state and local budgets, since, as defined-benefit programs, they are obligated to pay workers a defined amount in their retirement. But that’s largely a question of political priorities; underfunded pensions are the result of, well, decades of underfunding pensions. The real reason for the attack on pensions goes deeper, and exposes the great and growing rift between America’s economic elite and everyone else.
That’s a nice sweep under the rug. The problem with defined-benefit pension plans has always been that those in charge of the plans are reluctant to fund them properly, either because they want to use the money for something else (in a private business) or because they were overly generous in their pension promises and the chickens are now coming home to roost (in public pensions). That strikes me as a serious and ongoing problem worth more than just a handwave on the way to pointing the finger to Those Sinister Forces Over There who are to blame for all our woe, ‘America’s economic elite’. (Who are these sinister folk? Once again, the author is silent. Apparently we’re supposed to know instinctively who these beneficiaries of the Two Minute Hate might be.)
The whole reason the 401k was invented was because people were tired of putting their economic future in the hands of people whose incentives were all pointed the wrong way. I’d rather have a lump of money that I can manage myself than depend on the probity of pension fund managers (and, whoever ‘America’s economic elite’ might be, I strongly suspect that pension fund managers are in that number).
Consider how we 401(k) holders behave as investors. How many of us thought to sue Wells Fargo after the Consumer Financial Protection Bureau revealed that the bank had created millions of fake credit card and bank accounts? Or to push our fund managers to do so for us? How many of us call up our fund managers after a quarter, a year or a decade in which we underperformed the Standard & Poor’s 500-stock index to renegotiate our fees? Or even to switch managers? How many of us even know how our funds performed relative to the S.&P. 500?
Well, I do. That’s what being an investor is all about. However little influence we may have on a 401k fund manager, I would bet you money that it’s less than the influence we would have on the pension fund manager of a defined-benefit pension. Just think about that for a second and you’ll see it’s true.
At bottom, the problem is structural. We are to our investees and investment managers what nonunionized, “right to work” workers are to their employers: alone and devoid of leverage to negotiate. That stands in sharp contrast to traditional pensions, which, like unions, are collective and centrally managed.
And there you have the mask lifted at last. This is just an apologia for ‘collectively and centrally managed’ pensions, one more step on the road to a ‘collectively and centrally managed’ life. Wanting to be in control of our own destiny (and, despite the trash talk in the article, a 401k gives people a lot more control than a centrally managed pension fund) is a ‘structural problem’.
And the elephant in the room is the fact that almost all defined-benefit pensions have a certain minimum time in service — the one time I worked for a defined-benefit pension company, EDS, it was five years — whereas with a 401k any money you have in the account goes with you when you leave (and can be converted into an IRA that you can actively manage to your heart’s content) even if it’s only a month or so.
Remember, these are the days of employee mobility, where people jump from job to job as often as they like (or need to do), rather than spending decades in the same fabric-covered box. The longest time I ever worked for a single employer in my working life was the six years I spent in the Navy — for which I got no pension benefit; nor would I have gotten it for any other job I’d held except for that five years with EDS (which doesn’t translate to much of a pension benefit, let me tell you). Looking back on it, the existence of the 401k is the reason I have any pension pot at all.
Eventually we get to the real villains of the piece: ‘the Kochs and their allies’. That tells you everything you need to know about the author — and his chosen vehicle, the New York Times.