Proposals to create private investment accounts in Social Security will victimize ill-equipped investors, generate enormous fees for the mutual fund industry, and jeopardize the financial security of millions of Americans.

They will also become the victims of more sophisticated trading and marketing strategies designed to benefit investment professionals more than individual investors.

As explained in the book, “How 401(k) Fees Destroy Wealth and What Investors Can do To Protect Themselves,” the dangers stemming from proposals to create private investment plans will raise investment risk for unsophisticated investors over their entire working and retirement years.

Privatizing Social Security, Medicare, and Medicaid are the main goals of Republicans who have been pursuing the neoliberal agenda since the mid-1970s.

It is also the biggest prize Wall Street could ever imagine.

According to the Social Security Administration, in 2022, an average of 66 million Americans per month will receive a Social Security benefit, totaling over $1 trillion in benefits paid during the year. Social Security is the major source of income for most elderly Americans. So, it’s no wonder Wall Street is pushing Republicans to give them access to this pot of gold.

Pursuing Privatizations

Privatizing Social Security was first advanced by President George Bush in 2005 and later expanded upon by Representative Paul Ryan (W-Wis.) and Sen. John Sununu (R-N.H.) This topic was also the subject of a debate in 2016 between Democratic presidential candidate Hillary Clinton and Republican candidate Donald Trump.

On Oct. 16, 2018, Republican Senate Majority leader Mitch McConnell said that due to an increase in the federal budget deficit, Republicans would have to reduce and alter some of the key provisions in Social Security and Medicare.  In his announcement, McConnell said the only way to reduce the record-high federal deficit would be to cut entitlement programs like Medicare, Medicaid, and Social Security. In 2022, with Republicans poised to take control of the House, this same playbook will repeat itself.

Most recently (November 2022), Republicans again pushed the idea of cutting benefits and raising the retirement age–moves some observers think are the precursors to privatization or allowing more Wall Street investment managers early access to Social Security accounts.

Giving Wall Street Access to Social Security Accounts

Earlier proposals by Bush would have allowed workers under 55 to invest approximately half their payroll tax contributions into a private account managed by an investment manager or insurance firm. Presidential candidate Mitt Romney also supported this privatization plan.

Today, 401(k) participants pay the financial services industry about $164 million in fees daily. If privatization plans advance, this figure will increase dramatically, even as more investors get encouraged to chase investment returns or purchase expensive actively-managed, load funds.”

As described in the book, the politically partisan calls for privatizing Social Security will increase financial insecurity among investors and be part of the most significant wealth transfer in the nation’s history.

Privatizing Social Security, or allowing Wall Street investment firms to manage participant assets, will effectively expose millions of ill-equipped investors to the mutual fund industry, which aims to collect fees. There is also the reality that most fund managers have very little ability to deliver consistent, above-index market returns that would help improve their customers’ lives. That explains the sad fact that two-thirds of mutual funds fail to beat their benchmarks, according to Morningstar.

In a private Social Security account situation, millions of unsophisticated investors will be paying fees that are not readily visible, or they do not understand. For example, when investors see that a fund is charging a fee of 1%, they fail to know the cumulative impact of fees on eroding the value of investment portfolios over decades.

A General Accounting Office study found that over 20 years, each 1% paid in investment fees reduces an investor’s end return by approximately 17%. This drawdown is even worse if an investor pays their investment adviser an annual management fee of 1% and annual 401(k) fees of 1%. In this situation, an investor’s year-end return is cut by 34%.

Making Social Security Look More Like Medicare

Privatizing any aspect of Social Security into private accounts would follow the same blueprint Republicans enacted over 20 years ago when they opened Medicare to predatory private, for-profit health insurance companies. In both situations (Social Security and Medicare), millions of unsuspecting, ill-prepared average Americans would be bombarded with solicitations to pay a lot to private investment managers and healthcare companies for reduced benefits.

In Medicare, the federal government was forced o include a provision allowing private healthcare companies access to federal money via Advantage plans. Medicare Advantage plans are for-profit,  private insurance, but they have nothing to do with the Federal program, Medicare.

“Nearly from its beginning, Medicare has allowed private companies to offer plans that essentially compete with it, but they were an obscure corner of the market and didn’t take off until the Bush administration and Republicans in Congress rolled out the Medicare Modernization Act of 2003,” according to author and radio host Thom Hartmann. “This was the GOP’s (and a few corporatist Democrats’) big chances to privatize Medicare, albeit one bite at a time, finally.”

The law created Medicare Advantage plans under the Medicare Part C provision. In 2004, these plans were phased into a vehicle known as “risk-adjusted large-batch payments” to insurance companies offering Advantage plans, Hartmann explained. This system hinges on carefully selecting participants because the companies are paid on “an aggregate risk score of all their customers and, practically speaking, are paid in a massive lump sum.”

Hartmann said this system encourages Advantage plan providers to deny services to participants who may need more care while selecting healthier participants who will not need more care.

Republican efforts to erode Social Security could see the introduction of fee-heavy, privately managed accounts that would be heavily marketed to unsophisticated people in precisely the same way advertisements now bombard seniors during the Medicare open enrollment period.

In both cases, Republicans are pushing the agenda of America’s largest corporations, which want low-cost federal programs with more expensive and less effective private versions. In both cases, Republicans are promoting plans that will hurt average Americans.

The book “How 401(k) Fees Destroy Wealth and What Investors Can do To Protect Themselves” is available on Amazon. It is 287 pages, with six charts, a glossary, and 280 footnotes. ISBN 978-1477657997

On Oct. 16, 2018, Republican Senate Majority Leader Mitch McConnell announced that due to an increased federal budget deficit, Republicans would have to reduce and alter some critical Social Security and Medicare provisions. In his announcement, McConnell said the only way to minimize the record-high federal deficit would be to cut entitlement programs like Medicare, Medicaid, and Social Security.

“It’s disappointing, but it’s not a Republican problem,” McConnell said of the deficit, which grew 17% to $779 billion in fiscal year 2018.

This was an astounding announcement, especially as the nation approached the 2018 mid-term elections.  Discussions about altering Social Security, privatizing it, raising the retirement age, or cutting benefit levels have been done by Republicans since the Reagan administration, but articulating the need for a change raised the interest level among millions of people planning for retirement. This is because Social Security benefits represent about 33% of the income of the elderly.

Here was the reaction from Newsweek Magazine:

Mitch McConnell Calls for Social Security, Medicare, Medicaid Cuts After Passing Tax Cuts, Massive Defense Spending 

From the Los Angeles Times:

Mitch McConnell says it out loud: Republicans are gunning for Social Security, Medicare and Obamacare next

From the Washington Post:

McConnell says Medicare, Social Security causing ‘disturbing’ deficit increase

So when this historic announcement was made, I asked 20 of the nation’s largest investment firms, with a combined total AUM of over $14 trillion, all of which have significant retirement planning operations, this straightforward question:

During the week of October 16, Senate Majority Leader Mitch McConnell said that reductions to Social Security benefits would be needed to reduce the budget deficit. I wanted to ask if your firm has any statement on this proposal to cut Social Security and what it would mean to retirement planning.

So what did the nation’s largest financial planning firms say in reaction to McConnell’s announcement?  

Nothing.

The nation’s largest financial planning and money management firms, which spend millions in ads proclaiming their interest in building a secure financial future for retirees, did not mention this historic revelation.

There are some great reasons why the media relations departments did not want to respond to this simple inquiry.  First, I am a small website, so these giant firms don’t have to answer. That’s understandable. Second, McConnell’s announcement raises very delicate policy questions. However, many of the firms I asked had media relations people who specialize in policy, community, and retirement issues. So, if Social Security is not a retirement issue, these media relations people are being paid to do very little.

One of the few people who responded said their firm does not comment on “hypothetical” events, such as McConnell’s proposed alterations to Social Security.” When I noted that the investment industry comments daily on how market movements affect future prices and everything related to strategies and portfolios; it is all based on hypothetical scenarios. Still, when it comes to actual videotaped statements made by the Congressional leader of the Republican Party about Social Security, this program covers some 63 million people; everything became hypothetical and too fleeting for comment.

Now, we are dealing with some of the most innovative and highly-paid people in any industry, so when the media at the vast investment companies evade any discussion about the elephant in the room—Social Security- there must be a reason.  I bet that the investment industry wants all, or any part, of the $2.89 trillion in the Social Security trust fund and future revenue streams, so they can put it under their umbrella of assets under management and then sell over-priced investment products to the masses.

Why Are Large Investment Firms Silent on Social Security Changes?

The reason is simple: these firms will be the primary beneficiaries if the master plans to privatize Social Security or reduce its enrollment numbers are enacted by a Republican-dominated Congress. And even better, the long-fought battle by the financial services and insurance industries to dilute the U.S Department of Labor’s fiduciary standard (the rule that a financial advisor has to act in the best interests of their clients makes more sense when it is paired with changes in the way Social Security coverage is decreased and those contributions are diverted to private investment firms.

That is the one-two punch for average investors. When the two moves are combined—changing the way worker retirement contributions are collected and invested by financial firms and then sold in an environment that allows conflicts of interest and overpriced products to be sold to unsophisticated investors—the whole scenario makes much more sense.

Let’s face it: not many investor markets left in the world to conquer have this much money.  China is vast but poor. Europe is a mature market with few avenues left for market penetration. That leaves the average U.S investor as the last main flock of sheep to shear.

That is why the investment industry avoided any response to this historic announcement. They insist they are not political, but they are. They spend millions on lobbyists to defeat the fiduciary standard and quietly push for changes in Social Security. This is why they avoid discussing these issues. It is a plan best kept secret. It’s also a great example of a severe conflict of interest.

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