Why the Investment Industry Can’t–and Won’t–Solve the Retirement Crisis

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In a recent article in Bloomberg by Allison Schrager, a Bloomberg Opinion columnist, a senior executive at a large asset-management firm told her, “with surprising candor: “We don’t know how to solve the retirement problem.”

Such honesty is rare in the investment industry, but it’s unsurprising. The senior executive doesn’t know the solution to the retirement crisis because he is part of the problem. The solution will never come from the investment industry but from Washington.

That’s because the industry doesn’t want to solve the retirement crisis. If it did, it would have to wade into the world of political economy, that is, lobby Congress to make fundamental improvements and changes to domestic policy.

However, like the separation of church and state, the investment industry does not want to go there, at least publicly.

As Ms. Schrager wrote in her column, the industry’s standard answers to solving the crisis—saving more, having an income stream in retirement, more investor education, better portfolio management—are old, tired, ineffective suggestions that look good on paper but are not practical for everyday working Americans.

What’s missing in Ms. Schrager’s otherwise informative column is what she never mentions. Ms. Schrager is an economist, and the dismal science is traditionally structured and myopic.

This may explain why Ms. Schrager never mentions Social Security, the wealth gap, neoliberalism, industry attempts to privatize Social Security, raising the minimum wage, increasing the salary cap on Social Security taxes, wage stagnation, the importance of housing wealth, tax inequity, and the demise of unions as all being parts of the solution to fixing the retirement crisis.

This is not surprising for two reasons: first, the investment industry is not concerned about the political economy of retirement (at least publicly), and second, economists like Ms. Schrader consider these “externalities.”

Externalities are the costs or benefits caused by one party but financially incurred or received by another.

For some reason, maybe by tradition, they are not part of economic analysis. This is why economists don’t consider pollution a predictable outcome of mining, oil production, heavy manufacturing, and other industrial processes. In the pollution example, an externality happens when “a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution.”

The investment industry also has externalities, but not in the form of producing a physical product. So, while this analogy is not entirely valid, the comparison has some valid points.

First, in a thought-provoking essay, The International Monetary Fund raises issues that may apply to the retirement crisis. The article raises the problems of “the public good” and moral hazard.

If retirement is considered a social good, along with environmentalism, it might have some legal standing.

Second, the moral hazard argument may be applicable. A “moral hazard is a form of externality in which decision makers maximize their benefits while inflicting damage on others but do not bear the consequences because, for example, there is uncertainty or incomplete information about who is responsible for damages or contract restrictions.” Could this be applied to helping to solve the retirement crisis?

However, a more powerful reason is that the investment industry would love it if Social Security were privatized. If that happened, all those Social Security accounts would find their way into managing that nation’s investment firms. Privatizing Social Security is a dangerous political position, but the Republican budget calls for severe cuts to the program. Weakening Social Security is the first step towards privatization.

The Dangers of Neoliberalism To Retirement Security

Neoliberalism is a political philosophy antithetical to average citizens’ well-being.  It is a pro-corporate, pro-walth political philosophy that distains regulations, believes in privatizing public utilities and public agencies, and is against most forms of social welfare.

That’s a lot to absorb. Here is a paragraph that summarizes why neoliberalism also works against retirement security.

As cited in the paper, The Neoliberal Political Economy and Erosion of Retirement Security, by Larry Polivka and Luo Baozhen (The Gerontologist. April 1, 2015; 55(2):190)

Neoliberalism is fundamentally designed to reduce costs to the corporate sector, including reduction in labor costs (wages, pensions, and health care benefits) and to enhance profits. Neoliberal priorities also include low tax rates on income and wealth, which limits fiscal options for ensuring the solvency of the Social Security and Medicare programs, even as their importance grows. In short, understanding the challenges confronting our retirement security programs requires an analysis of the shift in the U.S. political economy towards neoliberalism and its differential impact on workers, retirees, investors, and corporate management.”

The two goals–retirement security and fighting neoliberal programs–cannot co-exist if people want to retire with any form of financial security.  The investment industry knows this, but they cannot publicly admit it.

Why the Investment Industry Can’t Solve the Problem

As an integral part of American capitalism, the investment industry (banks, insurance companies, securities firms, hedge funds, student loan companies, VC, and private investment firms) doesn’t publicly exert its collective power in the political sphere, and certainly not in any legislation that favors average investors.

Just the opposite. According to Open Secrets, the investment industry lobby is the most powerful in Washington. It has 950 lobbyists (65% of whom are former government employees) with a budget of $147 million working to advance and protect the legal and regulatory benefits the investment industry enjoys at the federal, state, and local levels. Many of these are antithetical to the interests of their customers. In the real world of investments and capitalism, protecting the power of the investment company is paramount to advancing the power of the individual investor. It’s that simple.

This occurred regularly when the investment industry lobbied for a decade against the DOL’s fiduciary standard, making the business more transparent and elevating the investors’ interest over the salesperson’s.

It happens every day when investment firm lobbyists work behind the scenes to change the language or entire rules and regulations that would benefit investors.

The industry went ballistic when Congress approved the creation of the Consumer Finance Protection Bureau and sought to target its sponsor, Senator Elizabeth Warren, as a persona non-grata in the investment industry.

The investment trade press also regularly reports on excessive fees and suitability lawsuits against employers and investment firms, even though these regulations and laws have existed for years.

There are other examples, but the point is that the industry still has trouble policing itself while intentionally not promoting legislation that could benefit retirees.

Instead, the industry regularly issues press releases on how investors feel about retirement, the size of their retirement accounts, how much to withdraw in retirement, statistics about how many people made emergency 401(k) withdrawals, the need for investor education, the benefits of saving and diversification, the importance of timing withdrawals from retirement accounts, and other topics that never address the real issues.

As a reporter for Pensions & Investments in the mid-1970s, I covered the pension industry, the primary income source for retirees. These vast pools of money attracted institutional fund managers and consultants, with their high fees and constant push to move into new asset classes and strategies.

The Investment Industry Would Love To Privatize Social Security

However, changes in union membership, the manufacturing sector, worker mobility, and the rising costs and regulatory burden of administering pension funds impaired the pension industry. As pension plans declined, 401(k) plans became popular. Employers welcomed the plans since they shifted almost all the regulatory and investment decision-making to workers, most of whom are ill-equipped to manage them. This is one reason why the retirement crisis persists. 

The two key benefits of pensions for average workers are professional management and providing a constant income stream. As Ms. Schrager notes in her column, “People have no idea how much money they need to retire. Their estimate of retirement costs increased 50% in the last four years, even though life expectancy barely changed.” A constant income stream would help pensioners budget and reduce financial anxiety.

But Ms. Schrader forgets that Americans already have an annuitization product. It’s called Social Security, and it provides monthly income to those who contribute to it throughout their working lives.

Ms. Schrager’s other valid point is that most people cannot manage a retirement account designed to produce returns 30 or 40 years into the future, endangered by factors like inflation, changes in withdrawal rates, and market volatility.

However, the investment industry is well aware of this. The sector will not take on the public role of political reform and advocacy on retirement-related issues.

If the investment industry wants to provide Americans with a more secure retirement future, they can stop posturing about trying to solve this problem. The financial media should also recognize that retirement security requires a political solution. One way is to raise the salary cap on Social Security taxes, restoring Social Security’s financial stability while addressing wage inequality. Expanding programs to make homeownership more available is another critical wealth-building engine that can make Americans more financially secure. So is raising the minimum wage.

The Solution Is Evident, The Will To Solve It Is Not

In this divided nation where no significant legislation on many issues will pass, retirement-related problems are not even on the agenda. This means retirees are on their own. Thankfully, there are low-cost and very effective investment alternatives, such as ETFs, low-cost mutual funds, and readily available model portfolios for working people.

However, investment solutions don’t work when the industry ignores that solving the retirement crisis requires political and economic remedies. However, we can rely on the fact that the investment industry will not enter the realm of political economy. If the past indicates the future, the industry will continue to be an obstacle to finding a solution to the retirement crisis.

 

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