Blackstone’s Tony James Touting What Looks Like Hillary’s Scheme to Gut Social Security

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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.

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101 comments

  1. der

    A friend who spends time in Spain tells me that Barcelona is going to shit, it seems Barcelonians have started their own “high-yielding and risk-reducing alternative asset” by turning their real estate “investment” into an AirBnB. Losing its hot go to destination, too many tourists.

    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?

    Exactly! The long con, sadly the grifters are both the house and the gambler, the addict and the therapist. Our Best & Brightest.

    1. Eric377

      Yogi Berra had it right. Nobody goes there anymore because it is too crowded. Well there is always Albacete.

  2. TheCatSaid

    Wow. The vampire squids want to siphon off workers’ earnings directly at source, to put into its own pockets.

    The financial sector must be reading the writing on the wall. Pension funds are starting to wise up, even if slowly, so they have to look for other revenue sources. Well, who says they are entitled to have other revenue sources?!

    Looks like I’ll have to get onto my legislators about this–Social Security will need all the public support it can get, with these vampire squids on the loose.

    1. cnchal

      . . .Well, who says they are entitled to have other revenue sources?!

      Money is speech, and Hillary has been spoken to by money for so long, the ‘who’ is money. It’s an investment. One dollar of speech to Hillary, returns a million down the road.

      We also have a lesson. One dollar of speech to naked capitalism let’s Yves tear billion dollar holes in Pirate Equity’s parade of theft. That’s my kind of leverage.

    2. Carla

      Wow, you think they’re your legislators? I hope they are. The legislators for my state and congressional district belong to Wall Street, either directly, or via the Democrat or Republican parties, as the case may be.

  3. voteforno6

    This idea is so insane, that I have a hard time believing that Congress would seriously consider it. Then again, maybe I’ve found my max threshold for cynicism, which I never thought would be possible.

      1. Pat

        Republicans MIGHT love it, but it will be a Clinton program. Their denying Obama a victory was a big advantage for those of us who support Social Security. I’m pretty damn sure that dynamic is still going to be in play.

        1. craazyboy

          There is a small group of Rs that don’t need SS, and a much larger group of Rs that desperately do. About the only good thing about the never ending attack on SS is that there are lots of strange bedfellows on the same side.

          Then we always have stock market crashes to look forward to. Those always dampen the enthusiasm for shoveling it all into stocks.

          Along the same vein, Climate change, Western 100 year drought, WW3, Trump in the White House, Forever War, etc… argue for a low Beta portfolio. So low only USG treasuries could be the investment of choice. And Blackstone has got ’em!!!! Just kidding!

    1. LT

      It is already set up.
      This would be a mandated financial service product.
      You don’t really think they walked Obamacare through all those Supreme Court challenges because they cared about you health?
      It was always about setting the legal prececedents for more mandated corporate welfare.

  4. Science Officer Smirnoff

    Recall strong opposition by a strong majority of Democrats (and some Republican Senators) to G W Bush’s attempted move in this direction.

    This monumental issue in a supposed new Clinton administration may boil down to the survival of the filibuster—which has been speculated could be ready for the axe—if Republicans as lately promised by McCain (among others) permanently block High Court nominees!

    Now there’s a choice: Clinton Supreme Court judges for a death by (a thousand) cuts to the safety net.

    1. NotTimothyGeithner

      I recall wishy washy responses from Democrats with an interest in having a conversation with the GOP, but I do recall boomers and near boomers going ballistic and Republicans plummeting in the polls which was only reversed during the Schaevo circus. The GOP elites were ultimately afraid of their voters and retired Shrub’s plans.

      Don’t look to allies in the Senate. Fear is the only thing these people understand.

      1. Arizona Slim

        Where is Bernie when we need him?

        Oh, right. He is out there on the campaign trail. And he is with Her.

        1. different clue

          But he never told his supporters that they have to be with Her. In fact he has told his supporters he expects and always did expect that they will make up their own minds about whether to be with Her or not.

          And indeed his supporters do have the freedom to be against Her. They can choose to excercise that freedom . . . or not . . . as they see fit. If they decide to be with Her and then say ” the Sanders made me do it!” they will be laughed at. They should understand that ahead of time.

        2. aab

          To be fair, that may be precisely so he can Chair Budget or HELP and slow this train down. Schumer certainly won’t.

    2. Science Officer Smirnoff

      postscript:

      Whatever the merits of a particular policy proposal, enactment will be a matter of political muscle — and that has been on display during James and Ghilarducci’s autumn events to promote “Rescuing Retirement,” the book version of their proposal.

      —referenced Sirota article

      Further addition—G W Bush ended up isolated in his own party as a result of the then current opposition to “privatizing social security”. It remains to be seen what form agitprop will take in another go around by these quacks good folks pursuing the common good (per Pete “Pig” Peterson)

      1. Science Officer Smirnoff

        Clarification: Obviously it takes Democrats in control of the Senate to nuke the filibuster.

        It is currently quite plausible the Democrats don’t get the Senate but do win the White House.

        It is still by no means a black swan event for the Republicans to win both Senate and White House and therefore shortly take control of all branches of government.

        The nuclear or constitutional option is a parliamentary procedure that allows the U.S. Senate to override a rule or precedent by majority vote. The presiding officer of the United States Senate rules that the validity of a Senate rule or precedent is a constitutional question. They immediately put the issue to the full Senate, which decides by majority vote. The procedure thus allows the Senate to decide any issue by majority vote, even though the rules of the Senate specify that ending a filibuster requires the consent of 60 senators (out of 100) for legislation, 67 for amending a Senate rule. The name is an analogy to nuclear weapons being the most extreme option in warfare. . .

        On November 21, 2013, Senate Democrats used the “nuclear option” to require only a majority vote to end a filibuster of certain executive and judicial nominees, not including Supreme Court nominees, rather than the 3/5 of votes previously required. A 3/5 supermajority is still required to end filibusters unrelated to those nominees.[14]–wiki

        [emphasis added]

        1. aab

          I’ve had a long day, but I think that’s a misstatement. The Republicans could nuke the filibuster, if they’re in the control of the chamber. As the system continues to spiral into worse dysfunction, I can imagine them doing it, too.

          I’m going to take this opportunity to say as a citizen, I do not think getting Hillary Clinton’s picks on the Supreme Court is worth killing Social Security over, just for the record.

  5. Higgs Boson

    There are two forms of “revenue” for Social security: there is the payroll tax, which is almost always discussed in terms of lifting the cap on income subject to the tax; there is also the special issue securities that pay interest to the “trust funds”.

    The interest rate is calculated according to this formula:

    Special-issue securities bear a nominal rate of interest determined by a formula in the law. The current formula was established by the 1960 amendments to the Social Security Act. The formula sets the rate applicable in a given month to the average market yield on marketable interest-bearing securities of the Federal government which are not due or callable until after 4 years from the last business day of the prior month (the day when the rate is determined). The average yield must then be rounded to the nearest eighth of 1 percent. This formula became effective with the October 1960 rate.

    And:

    The numeric average of the 12 monthly interest rates for 2015 was 2.021 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 3.37 percent in 2015. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.

    It seems to me that the interest rate could be changed by legislation to any amount. What’s the rationale behind this complicated formula? Why not just set it to a constant rate of say, 6%?

    Why 6%? Well, that’s the dividend member banks get from the Federal reserve.

    1. Yves Smith Post author

      Aha, thanks for pointing that out!

      Actually, Congress just cut the dividend rate for big banks (although they have filed a suit), but maybe the Trust Fund could get a one-time special retroactive payment and then go to the new rate. Or they could argue for the higher small bank rate because the Trust Fund is for individuals.

    2. craazyboy

      “What’s the rationale behind this complicated formula?”

      It’s simply because the “special treasury bonds” are created when the USG borrows surplus cash from the funds, as prescribed by law. The special treasury bonds are “non-marketable”, ie there is no direct market mechanism to determine what the “when issued” interest rate should be. [saves some broker commissions and a round trip thru Wall Street -good!] So the formula is a way to derive a similar interest rate from similar regular treasury bonds sold in treasury market auctions.

      As far as why not fix it at 6%? Dunno, except that in the 80s 6% didn’t sound so good with inflation at 12%. But at any rate, there would be plenty of ways to get more money into SS, if TPTB were genuinely interested in doing so. But that’s not what I see. And plowing it all into used stocks at present valuations (at least 2 times overpriced, methinks) certainly ain’t it.

      1. Optimader

        …..As far as why not fix it at 6%? Dunno, except that in the 80s 6% didn’t sound so good with inflation at 12%….

        Yes who here remembers 12% (or higher on mortgage interest)?

        Still, Congress can do whatever they want in the end. does it need to be an arcane formula? I think it is intended to cause ppl to avert their eyes.

        Pick a number that is a spread compared to some index, (cat food index?) and chain it. It’s done as matter of course to remove volatility in the private sector.
        Classic example
        https://www.thesteelindex.com

        1. Punxsutawney

          I remember those days. In fact I remember days not even that long ago where I was thrilled to have locked in a 7% mortgage.

          Times have changed, and not for the better.

    3. Benedict@Large

      It seems to me that the interest rate could be changed by legislation to any amount. …

      Yes, but that is a solution to the Trust Fund’s solvency. That’s not the issue. The issue isn’t insuring that the last payment can be made, but rather that the first payment is never made.

      The problem is that the only source available to pay off trust fund bonds is the general fund, and the use of all funds in or coming into the general fund (and then some) is already accounted for. That means in order to pay off the trust fund bonds, either a massive tax increase will be needed, or funds will have to be diverted from existing programs. Further, the only program large enough to provide the required funds is the military. It goes almost without saying then that neither of these options is going to be done. Not by this Congress, and not by any Congress that requires the massive graft we see today to get elected. [Alternatively, MMT could be adopted, and the problem would simply vanish, but that would require an intelligence that doesn’t seem present in the political world.]

      That would leave us with payment cuts, which I’ve estimated at approximately one third of current payment amounts. Tony James however takes a different approach. He calls for a Social Security II. Tell people they’ll have to up their contributions by a quarter. Of course this is simply calling a rose by another name. Social Security II contributions, exactly like Social Security I contributions, are simply disguised (massive) tax increases. And by doing it this way, the only thing we’ll be guaranteeing is the eventual need for Social Security III.

      1. craazyboy

        Scary description, but here you’re assuming SS trust fund bonds are going to be the first bonds evah that Uncle Sam has paid off without first selling new treasury bonds to get the money to pay them off with.

        So if we are lucky enough that things proceed the “normal” way, the $2.6 Trillion fund will be redeemed slowly over the next 16 years or so and add $2.6 trillion in today’s dollars to the present $20 trillion in national debt. And they stole that money from our paychecks fair and square.

        True, I’ve seen estimates that out past 2033 when the fund is depleted that for SS to be cash flow neutral – meaning paycheck deductions fully fund SS disbursements – they could only pay out 75%. (Tho I’ve become distrustful of any gov or private projections and would want to see about 10 other independent orgs work it out separately)

        So back to your beginning – you are describing an insolvent government – not an insolvent trust fund! I’ll bet some enterprising, energetic economist could prove beyond a doubt that 40 years of personal and corporate tax cuts have resulted in government tax revenue growth far below the growth rate of the economy. Of course there would be a deficit and large cumulative national debt, for those that sorta worry about stuff like that.

        But, what to do?

      1. Yves Smith Post author

        It is part of the government. The members of the Board of Governors, including staffers, are Federal government employees. The regional Feds are governance horrorshows, basically accountable to no one. They are not privately owned despite widespread urban legends otherwise.

  6. Kokuanani

    Is anyone else out there seeing the political ads about how Congress needs to “strengthen social security”? They’re running amid the other political dreck on my tv.

    Of course if you check the small print at the bottom, you’ll find they are sponsored by the Pete Peterson Foundation.

    These folks really are experts in foaming the runway.

    1. weinerdog43

      Thankfully, I’ve only seen those ads on Bloomberg. However, for the 1st time today I saw a counter ad from AARP directly referencing ‘saving Social Security’. I didn’t see the whole ad as I had already tuned out thinking it was one of Peterson’s noxious commercials. I’ll keep an eye out.

      I do think that people are now more attuned to these sneak attacks on Social Security now. I certainly hope so.

      1. Kokuanani

        Keep a sharp eye on anything from AARP. I fear their idea of “saving” may stem directly from Peterson. Please report.

        1. Pat

          While I do think you need to look at it from ‘how do they profit from this’ with AARP especially with regards to Medicare, their business model does not coincide with Peterson’s ‘more people on cat food so I can have more gold strategy’. They need seniors who can retire, who have extra money for those insurance policies, etc. Destroying Social Security is NOT to their advantage. At least it isn’t until they have a different business model.

          Edited to add: Unless AARP is one of the entities that gets to ‘invest’ those required accounts this is probably not going to do them any good. IF they are, well then run.

        2. Adams

          AARP was on board with the Grand Bargain when it was the shared enthusiasm and conventional wisdom of all the “grown ups” on the beltway cocktail circuit. They even made public statements supporting the Bowles-Simpson effort to “save” SS and Medicare, but backed off hastily when the membership revolted. They probably took offense at Alan Simpson’s statements that Social Security “is not a retirement plan,” and “senior citizens are the greediest generation” and, finally, that Social Security is like a “milk cow with 300 million tits.”

          Simpson was, of course, appointed by our moderate, bi-partisan Democratic President who continued to send messages that the Grand Bargain “is still on the table” long after Republicans rejected his offer of 90% program cuts (not all SS) for 10% tax increases.

          God save the Republican Party for their uncanny ability to reject Democrats’ slavish devotion to Republican Lite, and for Mitch McConnell’s idiotic commitment to “defeat Obama” at any cost, including the cost of opposing legislation that clearly supports their agenda.

    2. sgt_doom

      The Peterson Foundation, and the mention of the Blackstone Group in this article, could there possibly be a connection?

      Hmmmm. . . . Peter G. Peterson, co-founder of the Blackstone Group — Peterson also founded, along with David Rockefeller, his mentor, the Peterson Institute, dedicated to destroying Social Security, Medicare, Medicaid, and offshoring as many American jobs as possible!

      Hmmmm . . . . when Bill Clinton was first running for the presidency in 1991-1992 period, it was the Blackstone Group which gave him free office space to solicit donations for his campaign.

      Hmmm. . . . .Hillary Clinton’s top aid is Cheryl Mills who is on the board of directors of BlackRock, which is an offshoot of the Blackstone Group (Blackstone . . . BlackRock. . . . get it???), and today one of the Big Four Investment Firms which are the majority shareholders in the majority of major corporations in North America and Europe. (The others being Vanguard Group, State Street and Fidelity.)

      Hmmmm. . . It was Peter G. Peterson whom Billy Clinton appointed to his commission to “end welfare as we know it”!

      Hmmmm . . . .it is the Peterson Foundation which established Peterson’s “Austerity Project” within the New America Foundation (Peterson Foundation, along with Pew Trusts, is a major funder of them).

      1. craazyboy

        Ja, all cool guys. They got our best interest at heart. Pete likes making movies too. ‘Bout deficits and gubmint spending. Then the Peterson Institute is DC’s fav place to go for foreign policy wonk advice. Hillary thinks so too. She said that’s where she goes to figure out how to run the world. But Pete’s still a “small gubmint” guy at heart, so it’ll all work out.

  7. blucollarAl

    Consider as well the long term political implications. What you will have is a constituency of virtually all employed Americans in favor of any and every political act that benefits, enriches, bails out, and props up the financial sector of the economy. After all, everyone’s financial future and secure retirement will now and forever be intimately tied to the perpetual rise of stock prices. The most fundamental ideological premise of finance capitalism will henceforth become the basic belief of almost everyone: what is good for Wall Street is good for the U.S.A. Keep my retirement account growing whatever it takes! What began with the rise of the self-funded retirement account, aka 401K, will end here.

    The final transformation into oligarchy will be accomplished in the name of “helping the middle class”.

    1. maria gostrey

      i am reminded of the romans who (my classics major son tells me) made sure the guy waving the flag in battle was also the guy carrying the soldiers’ pay, thus, giving them an excellent incentive to display the desired amount of patriotic fervor.

      1. Science Officer Smirnoff

        I suggest quite seriously that any other Henry James characters who should run about be freed by Milly Theale (The Dove) in gratitude for her eternal and enigmatic generosity.

    2. tongorad

      The most fundamental ideological premise of finance capitalism will henceforth become the basic belief of almost everyone: what is good for Wall Street is good for the U.S.A.

      This is certainly the ideological premise behind Obamacare. And just about everything else, right?
      All hail the conquering disrupters!

    3. lyman alpha blob

      It already works that way to some extent. I’ve talked to a good number of intelligent people who don’t want to see much in the way of reforming or regulating the financial system. They know Clinton and most of the political establishment are crooks but as they near retirement age without a pension, they are dependent on social security (not going to live as they are accustomed on that) and their 401Ks that are filled with Silicon Valley stocks inflated by Wall Street chicanery, and they do not want to see those take a hit of any kind.

      The devil you know and all that, but putting one’s head in the sand isn’t going to keep this crooked system operating forever.

    4. different clue

      That will certainly happen if Clinton is elected. Will that happen if Trump is elected? What is Trump’s “plan” about Social Security? Anything? It there were any definitive evidence about what Trump is thinking about Social Security, it would be nice if someone brought it here.

      At some point people have to start realizing that someone is going to become President. There is no way to prevent that from happening. If one of the Big Two is a deadlier danger to our Retirement Survival than the other one, is it time for the Bottom 90% to start thinking about voting for the other one? A lot of us are not rich enough to survive the extermination of Social Security. We cannot afford the beautiful gesture of “voting Green” or whatever. Even given that “Green” is better than Clinton as a beautiful gesture, what if our survival demands the election of Trump in order to prevent the election of Clinton?

      There comes a time when “hard choices” must be made.

    5. Tom_Doak

      I don’t trust a plan like this any more than the rest of the posters here.

      However, is it possible that the Wall Streeters are looking at this from the “demand” side of the equation rather than just their fees? If there is suddenly a ton of new money forced into the market, won’t that push stock prices up? At least, until the current holders cash out?

      1. cnchal

        . . . is it possible that the Wall Streeters are looking at this from the “demand” side of the equation rather than just their fees?

        No. The country is being run like Wells Fargo.

        A small group of people at the top decided to turn the organization into an entity that only cared about enriching themselves.

        What Tony James is saying is, trust me, I’m from Wall Street and know what I’m doing. Which is enriching himself.

  8. financial matters

    Yes, definitely.

    We need productive investment not investment in various assets.

    Randy Wray sees productive capacity as the most useful thing for retirement security. The three legs of retirement can be seen as private savings, pensions and social security.

    As pensions have moved from defined benefit to defined contribution they have become much less reliable. They depend on proper management and there is no guarantee that any money will actually be there when you retire. Private savings are subject to very disruptive boom/bust cycles.

    As a society, just saving money doesn’t really do the trick as that money has to be able to buy something. Reflecting Keynes, Wray thinks the best method for retirement security as a nation is investing in plant and equipment and a skilled, trained and educated workforce. This produces a healthy functioning economy rather than a financialized one where there is no there there.

    Wray podcast</a

    Wray interview</a

    ———–

    I think Mariana Mazzucato and fellow authors have a lot of great ideas in their her new book Rethinking Capitalism.

    She emphasizes that the financial crisis was due to private debt and we are now wrongly focusing on public debt.

    Also gets into our investment problem. Businesses are spending money on share buybacks, dividends, executive compensation rather than wages, skill development of labor and productive capital development.

    1. Alejandro

      In his ‘never-ending’ search for clarity(redemption?), even Mr. Greenspeak seems to agree with R. Wray, as he struggles to Greensplain to a fellow Randian, who in turn seems stuck on “solvency”—“I wouldn’t say that pay as you go benefits are insecure…”-@0:30

      https://www.youtube.com/watch?v=DNCZHAQnfGU

      1. financial matters

        Interesting thanks.

        As MMTers note the government is the one that prints the money. The choices are how it is spent/distributed.

        But they also realize that the fundamentals have to be there to support this currency which is why a jobs guarantee is also an important part of their platform.

        1. BecauseTradition

          But they also realize that the fundamentals have to be there to support this currency which is why a jobs guarantee is also an important part of their platform. financial matters.

          What is important in that respect is that work be accomplished efficiently, not that people have jobs per se, e.g. let’s use bulldozers (efficient) rather than teaspoons to maximize jobs while wasting time, human energy and morale.

          It’s this simple – when the population has enough real income then the jobs that are deemed meaningful by the population and no others will be created.

          1. financial matters

            I think we need to be careful of the word efficient as it can play into certain neoliberal strategies focusing on profit.

            One question is who is creating the jobs? Not all jobs function well when only profit is considered. Many jobs that would be beneficial to the population are best funded by the government.

            We have a lot of need for basic care giving/reproductive type jobs for example. I like the idea of being deemed meaningful by the population and I think most communities could think of useful projects if funding was available.

          2. Benedict@Large

            “… let’s use bulldozers rather than teaspoons …”

            Saying that efficiency is not that great a concern when the goal is to employ surplus labor is not the same as calling for the use of teaspoons when digging a ditch. Anyone suggesting that has run out of arguments.

        2. Alejandro

          Thanks for the feedback.

          The spending choices are political, and the limits would seem to be economic capacity. Certainly in the context of full capacity, “maximum employment” would seem to be zero unemployment and full participation.

    2. sgt_doom

      Or as super-economists (as in Real Economists) such as Prof. Michael Hudson and E. Ray Canterbury say,

      inflating financial assets

  9. David Carl Grimes

    Read the Editorial of the NYTimes today. They call Hillary’s Social Security plan “rational” – as opposed to Trump’s. That maybe so. But is it “rational” as opposed to the current plan

  10. Chauncey Gardiner

    So another stealth plan by Wall Street to loot the 99 Percent and gut Social Security for their personal benefit… What a nauseating group of corruptors and the corrupt.

    Re the concluding sentence of this timely and excellent article, “Don’t say you haven’t been warned”, We the People lose our already modest leverage through the ballot box on November 9th.

  11. KYrocky

    Apparently, Wall Street is unable to quench its insatiable appetite for money by relying on the marketplace. The people with money are not choosing to buy what they are selling, and like a ravaged addict, Wall Street needs continuous inflows of humongous amounts of cash . The proposal outlined is intended to grift money from people who do not have much, if any, and give it to Wall Street, using the power of Government to force them to do so.

    This is not a free market solution to anything. This is a banana republic stealing from the many to reward the few favored.

    One need look no further than the looting of pension funds by PE and hedge funds, well discussed here but virtually ignored by everyone else, to understand the true, singular objective of this proposal. There is indeed a retirement crisis looming, and those in power intend to exploit that to the maximum advantage of Wall Street and to the detriment of every single other person in the country.

  12. Otis B Driftwood

    I don’t understand why the income limit for SS isn’t increased along with a commensurate increase in guaranteed benefits for retirees.

    I’m like most people who hate their 401(k) and are not capable of making “wise” investment decisions. I have my 401(k) money invested in the recommend funds of my employer, and I find I have achieved a whopping 1.5% gain in 2016.

    And given compensation listed for the Blackstone executives, why aren’t these people paying progressive income tax on their exorbitant income? The fundamental unfairness of our system is depressing.

    Clinton as the LOTE indeed.

    1. different clue

      There is no such thing as Robin Hood. Just as there is no such thing as Santa Claus.

      You may be mad as hell. But are you mad enough to vote for Trump? I am beginning to get there.

      1. mad as hell.

        Yea there is no Robin Hood. Though if a guy like Bernie Sanders can motivate the populace just imagine what will happen with an articulate, even tempered and intelligent candidate speaking on a similar page as the Bern, throws their cap into the ring. If even possible anymore in the democratic United States.

        I haven’t decided if I am going to vote. However if I do, it would be for Trump. What have I got to lose?. It is gonna pain me to see the queen rob the treasury, grease all influential palms and send other kids to meaningless wars.All this will be done throwing the 99% under the bus. I kind believe in the George Carlin theory. He didn’t vote because it only encourages them.

        “I don’t vote. Two reasons. First of all it’s meaningless; this country was bought and sold a long time ago. The shit they shovel around every 4 years *pfff* doesn’t mean a fucking thing. Secondly, I believe if you vote, you have no right to complain. People like to twist that around – they say, ‘If you don’t vote, you have no right to complain’, but where’s the logic in that? If you vote and you elect dishonest, incompetent people into office who screw everything up, you are responsible for what they have done. You caused the problem; you voted them in; you have no right to complain. I, on the other hand, who did not vote, who in fact did not even leave the house on election day, am in no way responsible for what these people have done and have every right to complain about the mess you created that I had nothing to do with.”

        George Carlin

        Imagine if he was alive today! Though this election would probaly have killed him,

  13. Pam

    In the 1980s the Thrift Savings Plan (TSP) was started under a new Federal Employees Retirement System (FERS)which replaced the old retirement system. TSP is just like you describe above. I always saw it as the government’s experiment in privatizing social security.

  14. Jim

    Is HRC’s proposal significantly different from the plan recently enacted in California? http://www.sacbee.com/news/politics-government/capitol-alert/article104911716.html. From what I can tell, workers’ retirement funds in California will be managed by the state, rather than private firms under Clinton’s proposal. I also haven’t seen anything indicating that workers’ savings in CA will be actively managed. However, it looks like state regulators still need to determine the “investment vehicle” for the savings collected by the plan. Some legislators have proposed individual accounts that change based on employees’ age. Unions have proposed that the funds be pooled and that a certain amount of funds be placed in a reserve to smooth out the ups and downs of the market. So perhaps the CA plan could end up being a sop to Wall street, too?

    I couldn’t agree more with Yves, though. The principal source of our retirement crisis is low wages. If people are living pay check to pay check, i’m not sure how forcing them to put a share of their nonexistent surplus into retirement accounts is really going to help.

    1. Elizabeth

      I heard about that plan a couple of weeks ago. My first thought was – oh, another pile of money for the state. There were very few specifics given such as, who manages the money, what is the “investment vehicle”, and will this money be guaranteed to the person upon retirement? What if the person moves out of Calif? Also, there are so many people who cannot afford a 3% deduction from their already meager paychecks they will have even less money to survive on.

      I’ve no doubt this plan would be a big gift to Wall Street and the democratic machine here.

  15. DJG

    From deep down in the original Sirota article, which has many an interesting detail:

    “While Ghilarducci said she supports expanding Social Security, doing so would be more politically difficult than enacting a separate program, she argued — especially since her initiative gets a boost from its association with an industry power player like James.

    “ ‘Tony certainly helps get an audience that the left couldn’t get,’ she said. “The political reality is, you have to have resources and coalition building.’ ”

    This sort of thinking is so wrong I can barely count the ways. Social Security is an existing program. What they want to do is to pass another ACA-Obamacare. So there’s a will in the form of “resources and coalition building” for passing needless legislation? In a Congress that can’t even hold hearings for a new Supreme Court justice? Nevertheless, Ghilarducci is an insider, and either she has some perspective that I can’t fathom, or else there are even more e-mails that have to be leaked about how they plan to pull this off. On the other hand, it is still more of that “I’d love to do it but can’t” rhetoric that is so common these days, just like sewage.

    All in all, a scandal in the making.

    1. Yves Smith Post author

      Every poll ever done shows well over majority support for keeping Social Security as is and raising taxes if needed. So the idea that Clinton needs people like James is bullshit. This is all about the money.

  16. L

    This is actually a two-fer. On the one hand they do kill social security. On the other they forceably pump large amounts of money into the stock market. In effect this is a bailout by other means whereby they hope to fix the stock market and create growth by forcing people to pour money into it that they would otherwise have spent on food lodging and other silly things.

    This is really a way of trying to keep Blackstone’s gravy train going.

  17. Carla

    This is a brilliant post, Yves. Many thanks. And thank you to all of those who have provided excellent comments, as well.

  18. flora

    Thanks for the warning.

    Neoliberalism in action. In 1980 Milton Friedman came out with his neoliberal touting book “Free to Choose”. So now we have a neoliberal insurance market – ACA – where individuals are coerced, forced to choose an insurance plan they may not want, in order to enrich private insurance companies. Blackstone’s plan is more of the same; forcing people to give up 3% of their already insufficient incomes to Wall St. enrichment.

    One quote from Mr. Friedman’s book:
    “There is no place for government to prohibit consumers from buying products the effect of which will be to harm themselves”

    Neoliberals have morphed it into:
    ‘There is every place for government to demand consumers buy products the effect of which may be harm to themselves but which will enrich Wall St.’

    Where, again, is the freedom to choose?

  19. financial matters

    I think it’s useful to remember that the way Social Security was originally set up was due to political constraints.

    “”The last word is pretty simple. Taxes. When Franklin D. Roosevelt created Social Security, he also created the bizarre, nonsensical system of accounting that the program uses for political reasons. When you and your employer pay FICA taxes, that money is nominally placed in the SocialSecurity Trust Fund. When Social Security benefits are paid out that money again nominally is paid out from the trust fund. FDR did this for political reasons to try to prevent Social Security from ever being destroyed by politicians. He reasoned that if people believed that they were getting “their money” out of the program when they retired, then they would resist any cuts or adverse changes to the program since they viewed it as their own money rather than some entitlement program.

    Because we live with this fiction that FICA taxes fund Social Security, we now have created the “problem” that in about 20 years the number written in the government’s spreadsheet for the trust fund of Social Security will be smaller than the amount of money that is being paid out in benefits. One of the ways to fix this non-problem is simply to raise payroll taxes. One widespread idea is to raise the cap on the amount of income subject to FICA taxes. Right now, only the first $113,700 of income is subject to FICA taxes. Everything after that is not subject to FICA. By removing the cap and subjecting all income to FICA taxes, the number on the government’s spreadsheet for the amount in the trust fund will be very big–big enough that the amount paid out in benefits can last another 80 years or so before the number on the spreadsheet starts getting smaller.

    For many of the ultra-wealthy, however, Social Security is not part of their retirement plans. Even the worst corporate executives still receive gold-plated retirement plans and sky high compensation. For many people making a few hundred thousand a year, Social Security payments might, and probably are, part of their retirement plans. But the ultra-wealthy don’t need or particularly want Social Security benefits, so they do not care much what happens to the program. But they do care deeply about their taxes. Therefore, it is in their best financial interest to push for cuts in the program rather than take the chance of a possible tax increase.

    In the accounting fantasyland of the government, there “appears” to be a “problem” with the number on a spreadsheet not being big enough. Back in the real world, Social Security is not funded by FICA taxes nor from payments from the trust fund.””

    How Social Security Really Works

    1. craazyboy

      Back in the real world, Social Security is not funded by FICA taxes nor from payments from the trust fund.””
      ————————-

      I really, really think MMTers need to lose this little verbal tick of theirs.

      Whatever contribution to truth, clarity and education they seem to attribute to statements like this are just NOT there. Take my word for it.

      1. jerry

        “Take my word for it.”

        Ah yes the hallmark of any well-reasoned and fact-supported argument. That’s Trumps’ line – “believe me”!

        It’s unfortunate that I had to scroll this far down the comments to find the first proper response to the fictional SS crisis. Until people understand how money actually works (as MMT does), the SS discussion is always going to get bogged down into “taxing the rich” and this whole egalitarian, philosophical debate instead of simple computer keystrokes, which is all it is.

    2. different clue

      It really is time for the Magical Monetary Thinkers to suspend their muddying-of-the-waters with their pet intellectual tinker toy for the time being. The self-satisfied prancing of “smarter-than-thou” stuff-strutting intellectuals with their prolix beautifully-spun rhetoric about how “taxes don’t fund Social Security” will merely destroy public confidence in Social Security and also destroy the sense of possessive vestedness which FICA payers feel about THEIR Social Security.

      That too is part of the Roosevelt quote. Roosevelt understood the politics of it and he based it on FICA taxes so “no damn politician could ever mess with Social Security”. FICA taxes “don’t fund it?” Well I have to PAY FICA taxes and those FICA taxes are a REAL LOSS to ME. If they don’t fund Social Security then what DO they fund? The answer is: Nothing At All. And the result is: rage, hate and bitterness at having our Social Security stolen on the excuse that it was never paid for to begin with despite all the FICA taxes which I! HAVE! PAYED!

      All so some brill-yunt in-DUH-lectuals can show off how smart they are.

      1. tongorad

        The self-satisfied prancing of “smarter-than-thou” stuff-strutting intellectuals with their prolix beautifully-spun rhetoric about how “taxes don’t fund Social Security” will merely destroy public confidence in Social Security and also destroy the sense of possessive vestedness which FICA payers feel about THEIR Social Security.

        As if MMT had some political clout. Yep, those darn MMT “intellectuals” (What is so arcane and snooty about describing the operational reality of how our money works?) – clearly, they are to blame for the threat that Social Security is under…

        If you’re looking for smarter-than-thou strutting, look no further than the Very Serious People and their malicious deficit-hawk shenanigans.

        Your anger is misplaced, methinks.

  20. dejavuagain

    Caines response at the debate in response to the question re social security – framed as SS running out of funds in 2030. He did not object to the framing.

  21. Knot Galt

    Excuse my relative naiveté. Do the restrictions that come with TTiP, aka private investment over public domains being protected in perpetuity, mean that once Wall Street takes control of my ‘gov’t-enforced’ retirement funds, Social Security in effect becomes an oxymoron for ever?

    Is this the death of SS?

    1. Chauncey Gardiner

      Excellent observation, Knot Galt, regarding the ceding of our national sovereignty to Wall Street and large transnational corporations under these intentionally and cleverly mislabeled “trade agreements” and related messaging by this administration.

      The $15 billion claim under NAFTA over cancellation of the Keystone XL pipeline and Enbridge’s late arrival at the Dakota Access Pipeline party are merely the templates for massive “feeding at the trough” at our expense IMO.

      The Supreme Court’s Citizens United decision must be overturned and campaign finance reform legislation enacted and enforced. We can anticipate that these initiatives will be opposed by entrenched special interests, the legacy political parties, and a majority of the incumbent office holders.

  22. casino implosion

    If I had to engrave the reason I’m a Trump voter on a thimble it would be “Obama was willing to weaken Social Security”.

    1. Pavel

      You mean he didn’t make up for that by closing Gitmo and ensuring there was a public option in the health care reform?

  23. TedWa

    How much power and control over our lives are we going to allow them to take?? My Gawd. They have us paying for insurance for cars and now, by law, health care and now this? When are we all going to be working for them and given cubicles to live in? WTF !! People need to stop fking with things that work.
    Stand up against total control of our lives !!

  24. OIFVet

    It’s a scam. Bulgaria implemented a version of this monstrosity back in 1999, making individual retirement accounts mandatory for those born after 1959. The future benefits of the BG version of Social Security were cut by 30% for these people, the thinking being that the individual retirement accounts managed by professional investment managers would produce much greater returns and increase retirement income. Well, 17 years later the managers have certainly profited handsomely, while the average individual has a whopping 1,900 lev (about $1,100) in his or hers retirement account. Given current life expectancy, that will result in a monthly benefit of 10 lev for males and 7 lev for females. That doesn’t even begin to approach the 30% SS benefit cut. Nice, eh?

    BTW, this legislation was written by US advisors from the Chamber of Commerce. One of the many experiments carried out in the Eastern European laboratories for later implementation in the imperial homeland.

  25. JimTan

    Wow. I’m almost afraid to ask what the 2.0 version of going after Social Security looks like.

    Currently Social Security payroll taxes flow directly to retired beneficiaries. Any modest surplus between this payroll tax, and the retiree’s defined benefit (with administrative costs), is invested in US Treasury bonds for later use in times of deficit.

    Converting this system to a private plan with money managers means generating sufficient assets to meet the anticipated payments to pensioners. In order to gain these assets to invest with private money managers, the US government would have to borrow a substantial amount of money. Put another way, we currently have an unfunded pension system, and privatizing it with money managers would require a partially or fully funded pension system. I think Chile did this in the 1980’s and had to raise (through borrowing, business privatizations, and budget surpluses) the equivalent of 40% of their GDP to fund the pension plan. This could be one serious payday for the money managers (impact to debt/GDP ratio, and market risk to retiree benefits notwithstanding).

  26. Pavel

    I’m a jaded old geezer but I’m now signing on with the 25% of millennials hoping for the Giant Meteor™ to arrive and put us all out of our misery.

  27. tongorad

    Identity politics are so hollow. It turns out that there’s worse things in life than being sexist. These 2 “first ever” presidents might just end up being the worst we’ve ever had.

  28. Sluggeaux

    Right off the bat, in the video paired with Sirota’s IBT take-down, Tony James is touting “it doesn’t cost anything to earn 2” because “we can invest this money and earn 7.” I think that I’ve got a bridge that I can sell you that will earn you 10…

  29. crittermom

    Excellent article, Yves. Thank you!
    It helped to clarify some financial workings to someone like me who has difficulty making sense of it all.

    I knew that SS was under attack but didn’t understand how its demise was going to be implemented.
    I already lost everything to the banksters (my home) so they could increase their already outrageous salaries and golden parachutes through stealing—or at least thought I had. Now this?

    Now I have a much better understanding of how those in power intend to destroy it for their own benefit.
    “…pooled plans run by professional investment managers” Yikes! More of the same.

    Enough is enough is enough!

  30. susan the other

    3% is a lot of money. an additional 3% coming out of payrolls should never be sent to private money managers. that credit should be sent directly to a government fund for specific purposes, paying for goods and services which retirees need. in turn this added consumption will be a stimulus for those companies that provide real and useful products; possibly green industries. instead of being a useless and wasteful bail out for wall street, the 3% solution could actually be a good investment with guaranteed returns for both seniors and businesses. If payrolls are burdened with an extra 3%, that money will be taken out of consumption for the youngest payers but given back to retirees. So the money goes full circle and keeps good businesses going; creates jobs. There could also be some bargaining power involved because the fund will be enormous. But never never never let Hillary send that money off to her cronies on Wall Street. Those days of “growth” are dead and gone.

  31. jrs

    It doesn’t even seem to make sense from an “everyone needs to invest their retirement in Wall Street perspective”, when most mainstream investment advice is: most actively managed money doesn’t do any better than a low fee index funds, save on fees and invest in index funds.

    So no I don’t favor the stock and bond markets as the main retirement vehicle (I favor Social Security), but *EVEN IF* one did favor them, all in index funds or mixed index funds (that is both stocks and bond funds) with low fees would seem to make the most sense – nothing actively managed that is. That is mainstream investment consensus. I don’t deny a few people can beat index funds, but most individuals don’t have that inclination, time, or talent and NEITHER DO most fund mangers after their fees, including any we are bound to get.

    Now if we had Hillary’s cattle future advisors as investment managers then maybe … that’s a joke, Hillary has no idea about any investing that doesn’t involve insider information (ie cheating and breaking the law).

    Something like this does truly deserve the name of state capitalism, it’s certainly no workers state, it’s not public ownership for the common good, and yet it’s not private investment when workers taxes of all things are funding the main investments of a society (and it’s a tax – even the Supreme Court would agree). All the costs of socialism, none of the benefits.

  32. Praedor

    Gads. A constitutional amendment to overturn Citizens United ALSO needs to include language to prevent government from requiring citizens to purchase ANY private, for-profit product. This includes private insurance but also privately-controlled, for-profit 401(k) or any other for-profit investment scheme/instrument. Kill this vile activity by corrupted government forever.

  33. Paul Jurczak

    Bill Clinton planned to privatize Social Security in the second term of his Presidency. The Monica Lewinsky scandal derailed his plan.

    She should be awarded Congressional Gold Medal for her services to the nation.

  34. flora

    (with apologies to Pepsodent.)

    ” You’ll wonder where your money went
    when they send your cash to Blackstone’s rent.”

  35. Alan Bickley

    How can anyone hold that fiddling with Social Security will do anything, good or bad, for the budget? SocSec is NOT a part of the budget.

    1. craazyboy

      Unfortunately, they made it part of the general budget. For decades, the surplus SS funds collected were counted as a positive and did make the annual deficits smaller. Bill Clinton’s much celebrated 2 years of balanced budget(the only two in my working life) would have still been a deficit, but the SS surplus (very high back then) made it appear as a balanced budget.

      Now that we actually need the funds for their intended use, they no longer have the rosy effect on the balance of other taxation vs spending.

  36. Matthew Guldin

    There aren’t many things for Wall Street to loot in the U.S. Primary education and Social Security are the two largest pools that private equity has been itching to get their fingers into for a quite a while.

    Clinton just can’t do this in isolation as she would face rage from populist GOP politicians (my bet is that you see some of them start to emerge after this election irregardless) and many on the Democratic side of the aisle.

    It will have to be part of a broader grand bargain on reforming entitlements as well as taxes so that it will be such a large, encompassing bill that the media won’t have the time or inclination to focus on this issue.

    The thing that is so frustrating is that from an actuarial standpoint SSI isn’t that difficult to fix. It just requires some tough compromises. The issue that is going to sink the federal and state budgets are healthcare costs. They are already are if you look at retirement benefit health care costs and the percentage of the federal and state budgets (Medicaid) they already consume.

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