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Wall Street Takes Workers’ Retirement Money and Uses It Against Them

68 points by itronitron 5y ago

refurb 5y ago
This is such a bizarre article since it’s the pension plans themselves who choose to invest in private equity.
sesuximo 5y ago
The case in Pennsylvania is not representative of pension funds. If you read the linked article from Bloomberg, it explains that this allocation in “alternative” investment is double the average.
- kolbe 5y ago
  Double isn’t a substantial enough difference for your comment to materially matter. If the article had said they spend $2b in fees instead of $4b, the point doesn’t change.
info781 5y ago
So they feel they can not just put it all into VOO and VTI? Buffet has been saying for a long time it is tough to beat these two due to low fees.
- ashtonkem 5y ago
  The issue is not finances, the issue is politics.
- elliekelly 5y ago
  The workers don’t really have much say in how a pension fund allocates investments.
- decompiled_dev 5y ago
  Vanguard, the company behind those funds exerted a lot of pressure on the industry by offering those for such low fees. There are still lots of other funds that charge high fees to this day though. I am not sure about specific ETFs, but some of them will lend out their shares to make up for the no fees though. Additionally from a cooperate governance point of view the ETFs will generally vote for whatever management recommends. If the majority shareholder of a company is an ETF then management doesn't have meaningful oversight. If you don't want to follow a bunch of companies than Vanguard funds are probably a good choice though.
- apendleton 5y ago
  I think the argument is that even if this maximizes yield, on a market-wide basis it might be making workers worse off in aggregate because they make lower wages due to their money being spent to oppose worker protections etc., and that that harms more than a highest possible yield would help.
bedobi 5y ago
Surprised and disappointed the most obvious and worst problem isn't even mentioned: retirement holdings are lent out (for a small fee) to short sellers, a direct and blatant conflict of interest, and there's nothing the supposed beneficiary can do about it. This should be illegal but no one cares.
- peterbonney 5y ago
  Can you explain the conflict of interest?
  - idkidkidkidk 5y ago
    I assume author means, people who invest in mutual funds/retirement accounts want the value to go up, thats why they bought shares. Author is saying that then the money from share purchase is then lent to short sellers who short the stocks included in those retirement accounts/mutual funds which works to lower the price of the value of those shares. I think when it comes to preventing money from being made available to short sellers probably wouldn't improve the financial system long-term, but i see how this could be interpreted as a frustrating facet of our current system.
    - chii 5y ago
      > lower the price of the value of those shares short selling doesn't lower the price of a stock. Short selling is one of the actions which may reveal the true price, which may be lower than the current market price. Or the short seller may be wrong, in which case they paid a fee for a loss (or at best, for nothing in return).
  - bedobi 5y ago
    As a holder of shares in a company for retirement, why would I want to in any way enable short sellers to artificially drive the price of those shares into the ground, or even bankrupt the company? Like yes there is a tiny fee to compensate but it's no where near proportional to the damage done. Only a small portion of shares of any given company are ever actually available to trade. So even a small number of stocks sold short can overwhelm the market and drive the price down far, far more than the fees collected make up for. Even if the short sellers aren't successful in driving down the price, the stock is still not gaining as much as it otherwise would have due to the added selling pressure that otherwise wouldn't have been there.
deevolution 5y ago
It's called rehypothecation. They take your savings and buy up assets or use it for collateral. That's the consequence of using custodial services - they can do whatever they want with your money.
djrobstep 5y ago
In Australia this situation has reached whole new extremes. Retirement funds are huge because a compulsory 10% of all wages must be invested in a retirement ("superannuation") fund, not able to be spent until retirement age. The total savings is over $3 trillion, and annual fees each year amount of ~2% of GDP (twice what Australia spends on electricity each year, and nearly as much as the military budget). Oddly enough, it's unions and the Labor party themselves who set up this arrangement, during a neoliberal phase in the 90s. Ostensibly, it was supposed to give workers secure retirements, but it's simply replicated the inequality of the labor market, and left the poorest people with the lowest balances (elderly women are now the most impoverished demographic in Australia, mostly due to these privatized pensions). So it's failed to fix poverty, failed to provide secure retirements, lowered spendable wages for every working age Australian - not to mention invested in anti-worker companies and participated in privatization as discussed in the article above. Sadly, the Labor party still defends the scheme, due to being unwilling to admit that one of their flagship projects was a mistake.
- chii 5y ago
  Total hog wash. Superannuation is one of the best piece of gov't policy ever conceived, with the exception of probably free public education. It has made australians one of the richest in the world. It has allowed people who would otherwise squander their savings to have investments that they can live off in their retirement. I do agree that some superannuation providers are price gauging on unsuspecting customers - but realistically, these people should have known better, and shop around. Good industry-run super providers are very cheap and cost effective, and generate at least market returns. The problem of inequality or poverty for people with low balances in their super is not something that this policy aims to solve. There will always be people in situations where they are unable to contribute. That's why the pension system exists - a final safety net. Super is not a mistake at all, and I'm very glad that this policy is instituted for australians. They would've been very much poorer over all, had it not been done.
  - djrobstep 5y ago
    None of what you say is true. > It has made australians one of the richest in the world. Which Australians? It's certainly helped already rich Australians dodge taxes, if that's what you mean? > It has allowed people who would otherwise squander their savings to have investments that they can live off in their retirement. Why not force people to save 100% of their incomes, if all spending is simply squandering? If you want to increase savings, there are much better ways to do it (Norway's SWF for instance). The idea that a minimum wage worker would be saving 10% of their income instead of putting food on the table is crazy. Lowering the spendable wages of already low paid workers by a further 10% is a terrible thing to do. > Good industry-run super providers are very cheap and cost effective, and generate at least market returns. Even "good" industry funds have fees ~20x higher per invested dollar than Norway's SWF, and performance no better than a basic index-following approach with a fraction of the fees. > The problem of inequality or poverty for people with low balances in their super is not something that this policy aims to solve. Wrong - Labor and the union movement claim it's about security and dignity in retirement. Of course, Keating's real goal was to privatize a core function of the welfare state, and provide a tax dodge for the rich. > There will always be people in situations where they are unable to contribute. That's why the pension system exists - a final safety net. That would make sense if the pension was anywhere near the poverty line - it isn't. And if the pension is there to provide security in retirement... what is super for? > They would've been very much poorer over all, had it not been done. Ask elderly women living in homeless shelters how rich they feel thanks to super and a pension that isn't enough to afford food and shelter. Keating could have set up super to create a Norway-style SWF that funded above-poverty-line pensions for all. But he chose not to because his goal was privatization and the gutting the welfare state.
woah 5y ago
Too bad the ideological schmalz is being laid on too thick for them actually to get to the real question: why are state pension managers investing the money so badly? This article could just as easily have been written by a right wing libertarian magazine about how government money managers are wasting everyone's money. My guess, knowing nothing about the subject, is that "alternative investment" funds wine and dine the pension managers a lot more than a boring index fund will.
- _marlowe_ 5y ago
  You can thank the Fed. Pensions and their consultants publish an assumed rate of return, which is increasingly difficult to obtain in a sustained low interest rate environment. They have been increasing exposure to private markets to compensate for low returns in fixed income("yield seeking"). There is additional pressure since public and private pensions are typically underfunded, and overly aggressive return assumptions give cover to the states and companies that don't fund them to the extent they should.
- djbebs 5y ago
  Like many things the answer is extremely simple. Because they are not the ones paying the cost of mismanagement, and they have a captive audience that is both legally prohibited to go elsewhere, and practically ignorant of how mich they are getting screwed.
deleted 5y ago
[deleted]
WalterBright 5y ago
It's hard to take seriously an article that is so heavily laden with hyperbolic prose. Like this from the 2nd and 3rd paragraphs: "monocled, mustache-twirling oligarch", "secret control panel", "faceless", "takeover of Oz" "fleeced", "skimmed", "self-enriching", "waging a class war", "bankrolling", "profiteering", "wage a war" And on for every subsequent paragraph.
- anm89 5y ago
  It's Jacobin. Garbage like this is all they do. It's their specialty.
  - deleted 5y ago
    [deleted]
- seanicus 5y ago
  Yeah, the article has some great points, but Jacobin is very far into it's own politics. An article on the same topic using most of the same points with less inflammatory language from a more mainstream source would be far more effective.
WalterBright 5y ago
Having someone else in charge of one's investments always has these results. They invest for their benefit, not yours.
mensetmanusman 5y ago
“ The new bipartisan infrastructure framework announced by President Joe Biden includes a push for “asset recycling” — the process whereby governments sell off roads, bridges, airports, and other public assets to Wall Street investment firms. If this sounds familiar, that’s because — in the spirit of Biden’s promise that “nothing will fundamentally change” — the proposal is a recycled asset from President Donald Trump’s kleptocratic White House. And indeed, Trump’s infrastructure adviser — who worked at infrastructure investment firm Macquarie — is talking up Biden’s proposal as a way to help Wall Street firms buy up and profit off everything from federally owned dams to airports.” Wups
anm89 5y ago
Wow, are you telling me that a magazine who views all investment markets as unethical doesn't like Wallstreet. Shocker.
- ashtonkem 5y ago
  “Ohio public pensions paid double in new fees to Wall Street that it saved by freezing inflation adjustments on payouts” is a bit more concrete than “not liking wall street”.
  - anm89 5y ago
    The headline could have been Jamie Dimon knits sweaters for kittens and Jacobin would talk about how the wall street banksters are mercilessly waging class war on just good old regular folks like you and me. My point is it doesn't matter what Jacobin says on anything because they have exactly one take on everything. It doesn't make the story not true, it just makes it not worth listening to their take on it.
    - seanicus 5y ago
      You're not entirely wrong but you'd be a lot more right if you read the article and actually refuted the specifics of it, not just Jacobin's political leanings.... to be fair if this was from the other side and written on Breitbart I'd expect the exact same reactions in the comments, even if it had some similarly good points.
      - anm89 5y ago
        I mean, I think Breitbart is a perfect example. I'm sure between the mounds of falsehoods and trolling they throw out, they make plenty of factually correct points. But I'm not going to validate them by reading through all of the junk just so I can find the 5% they got right and congratulate them. They are a junk publication so you just call them a junk publication and move on. Jacobin is Breitbart on the other side of the spectrum. They don't deserve to be validated with discussion. That's my subjective opinion.

68 points by itronitron 5y ago

This is such a bizarre article since it’s the pension plans themselves who choose to invest in private equity.

The case in Pennsylvania is not representative of pension funds. If you read the linked article from Bloomberg, it explains that this allocation in “alternative” investment is double the average.

kolbe 5y ago
Double isn’t a substantial enough difference for your comment to materially matter. If the article had said they spend $2b in fees instead of $4b, the point doesn’t change.

info781 5y ago

So they feel they can not just put it all into VOO and VTI? Buffet has been saying for a long time it is tough to beat these two due to low fees.

ashtonkem 5y ago
The issue is not finances, the issue is politics.
elliekelly 5y ago
The workers don’t really have much say in how a pension fund allocates investments.
decompiled_dev 5y ago
Vanguard, the company behind those funds exerted a lot of pressure on the industry by offering those for such low fees. There are still lots of other funds that charge high fees to this day though. I am not sure about specific ETFs, but some of them will lend out their shares to make up for the no fees though. Additionally from a cooperate governance point of view the ETFs will generally vote for whatever management recommends. If the majority shareholder of a company is an ETF then management doesn't have meaningful oversight. If you don't want to follow a bunch of companies than Vanguard funds are probably a good choice though.
apendleton 5y ago
I think the argument is that even if this maximizes yield, on a market-wide basis it might be making workers worse off in aggregate because they make lower wages due to their money being spent to oppose worker protections etc., and that that harms more than a highest possible yield would help.

bedobi 5y ago

Surprised and disappointed the most obvious and worst problem isn't even mentioned: retirement holdings are lent out (for a small fee) to short sellers, a direct and blatant conflict of interest, and there's nothing the supposed beneficiary can do about it. This should be illegal but no one cares.

peterbonney 5y ago
Can you explain the conflict of interest?
- idkidkidkidk 5y ago
  I assume author means, people who invest in mutual funds/retirement accounts want the value to go up, thats why they bought shares. Author is saying that then the money from share purchase is then lent to short sellers who short the stocks included in those retirement accounts/mutual funds which works to lower the price of the value of those shares. I think when it comes to preventing money from being made available to short sellers probably wouldn't improve the financial system long-term, but i see how this could be interpreted as a frustrating facet of our current system.
  - chii 5y ago
    > lower the price of the value of those shares short selling doesn't lower the price of a stock. Short selling is one of the actions which may reveal the true price, which may be lower than the current market price. Or the short seller may be wrong, in which case they paid a fee for a loss (or at best, for nothing in return).
- bedobi 5y ago
  As a holder of shares in a company for retirement, why would I want to in any way enable short sellers to artificially drive the price of those shares into the ground, or even bankrupt the company? Like yes there is a tiny fee to compensate but it's no where near proportional to the damage done. Only a small portion of shares of any given company are ever actually available to trade. So even a small number of stocks sold short can overwhelm the market and drive the price down far, far more than the fees collected make up for. Even if the short sellers aren't successful in driving down the price, the stock is still not gaining as much as it otherwise would have due to the added selling pressure that otherwise wouldn't have been there.

deevolution 5y ago

It's called rehypothecation. They take your savings and buy up assets or use it for collateral. That's the consequence of using custodial services - they can do whatever they want with your money.

djrobstep 5y ago

In Australia this situation has reached whole new extremes. Retirement funds are huge because a compulsory 10% of all wages must be invested in a retirement ("superannuation") fund, not able to be spent until retirement age. The total savings is over $3 trillion, and annual fees each year amount of ~2% of GDP (twice what Australia spends on electricity each year, and nearly as much as the military budget). Oddly enough, it's unions and the Labor party themselves who set up this arrangement, during a neoliberal phase in the 90s. Ostensibly, it was supposed to give workers secure retirements, but it's simply replicated the inequality of the labor market, and left the poorest people with the lowest balances (elderly women are now the most impoverished demographic in Australia, mostly due to these privatized pensions). So it's failed to fix poverty, failed to provide secure retirements, lowered spendable wages for every working age Australian - not to mention invested in anti-worker companies and participated in privatization as discussed in the article above. Sadly, the Labor party still defends the scheme, due to being unwilling to admit that one of their flagship projects was a mistake.

chii 5y ago
Total hog wash. Superannuation is one of the best piece of gov't policy ever conceived, with the exception of probably free public education. It has made australians one of the richest in the world. It has allowed people who would otherwise squander their savings to have investments that they can live off in their retirement. I do agree that some superannuation providers are price gauging on unsuspecting customers - but realistically, these people should have known better, and shop around. Good industry-run super providers are very cheap and cost effective, and generate at least market returns. The problem of inequality or poverty for people with low balances in their super is not something that this policy aims to solve. There will always be people in situations where they are unable to contribute. That's why the pension system exists - a final safety net. Super is not a mistake at all, and I'm very glad that this policy is instituted for australians. They would've been very much poorer over all, had it not been done.
- djrobstep 5y ago
  None of what you say is true. > It has made australians one of the richest in the world. Which Australians? It's certainly helped already rich Australians dodge taxes, if that's what you mean? > It has allowed people who would otherwise squander their savings to have investments that they can live off in their retirement. Why not force people to save 100% of their incomes, if all spending is simply squandering? If you want to increase savings, there are much better ways to do it (Norway's SWF for instance). The idea that a minimum wage worker would be saving 10% of their income instead of putting food on the table is crazy. Lowering the spendable wages of already low paid workers by a further 10% is a terrible thing to do. > Good industry-run super providers are very cheap and cost effective, and generate at least market returns. Even "good" industry funds have fees ~20x higher per invested dollar than Norway's SWF, and performance no better than a basic index-following approach with a fraction of the fees. > The problem of inequality or poverty for people with low balances in their super is not something that this policy aims to solve. Wrong - Labor and the union movement claim it's about security and dignity in retirement. Of course, Keating's real goal was to privatize a core function of the welfare state, and provide a tax dodge for the rich. > There will always be people in situations where they are unable to contribute. That's why the pension system exists - a final safety net. That would make sense if the pension was anywhere near the poverty line - it isn't. And if the pension is there to provide security in retirement... what is super for? > They would've been very much poorer over all, had it not been done. Ask elderly women living in homeless shelters how rich they feel thanks to super and a pension that isn't enough to afford food and shelter. Keating could have set up super to create a Norway-style SWF that funded above-poverty-line pensions for all. But he chose not to because his goal was privatization and the gutting the welfare state.

woah 5y ago

Too bad the ideological schmalz is being laid on too thick for them actually to get to the real question: why are state pension managers investing the money so badly? This article could just as easily have been written by a right wing libertarian magazine about how government money managers are wasting everyone's money. My guess, knowing nothing about the subject, is that "alternative investment" funds wine and dine the pension managers a lot more than a boring index fund will.

_marlowe_ 5y ago
You can thank the Fed. Pensions and their consultants publish an assumed rate of return, which is increasingly difficult to obtain in a sustained low interest rate environment. They have been increasing exposure to private markets to compensate for low returns in fixed income("yield seeking"). There is additional pressure since public and private pensions are typically underfunded, and overly aggressive return assumptions give cover to the states and companies that don't fund them to the extent they should.
djbebs 5y ago
Like many things the answer is extremely simple. Because they are not the ones paying the cost of mismanagement, and they have a captive audience that is both legally prohibited to go elsewhere, and practically ignorant of how mich they are getting screwed.

deleted 5y ago

[deleted]

WalterBright 5y ago

It's hard to take seriously an article that is so heavily laden with hyperbolic prose. Like this from the 2nd and 3rd paragraphs: "monocled, mustache-twirling oligarch", "secret control panel", "faceless", "takeover of Oz" "fleeced", "skimmed", "self-enriching", "waging a class war", "bankrolling", "profiteering", "wage a war" And on for every subsequent paragraph.

anm89 5y ago
It's Jacobin. Garbage like this is all they do. It's their specialty.
- deleted 5y ago
  [deleted]
seanicus 5y ago
Yeah, the article has some great points, but Jacobin is very far into it's own politics. An article on the same topic using most of the same points with less inflammatory language from a more mainstream source would be far more effective.

WalterBright 5y ago

Having someone else in charge of one's investments always has these results. They invest for their benefit, not yours.

mensetmanusman 5y ago

“ The new bipartisan infrastructure framework announced by President Joe Biden includes a push for “asset recycling” — the process whereby governments sell off roads, bridges, airports, and other public assets to Wall Street investment firms. If this sounds familiar, that’s because — in the spirit of Biden’s promise that “nothing will fundamentally change” — the proposal is a recycled asset from President Donald Trump’s kleptocratic White House. And indeed, Trump’s infrastructure adviser — who worked at infrastructure investment firm Macquarie — is talking up Biden’s proposal as a way to help Wall Street firms buy up and profit off everything from federally owned dams to airports.” Wups

anm89 5y ago

Wow, are you telling me that a magazine who views all investment markets as unethical doesn't like Wallstreet. Shocker.

ashtonkem 5y ago
“Ohio public pensions paid double in new fees to Wall Street that it saved by freezing inflation adjustments on payouts” is a bit more concrete than “not liking wall street”.
- anm89 5y ago
  The headline could have been Jamie Dimon knits sweaters for kittens and Jacobin would talk about how the wall street banksters are mercilessly waging class war on just good old regular folks like you and me. My point is it doesn't matter what Jacobin says on anything because they have exactly one take on everything. It doesn't make the story not true, it just makes it not worth listening to their take on it.
  - seanicus 5y ago
    You're not entirely wrong but you'd be a lot more right if you read the article and actually refuted the specifics of it, not just Jacobin's political leanings.... to be fair if this was from the other side and written on Breitbart I'd expect the exact same reactions in the comments, even if it had some similarly good points.
    - anm89 5y ago
      I mean, I think Breitbart is a perfect example. I'm sure between the mounds of falsehoods and trolling they throw out, they make plenty of factually correct points. But I'm not going to validate them by reading through all of the junk just so I can find the 5% they got right and congratulate them. They are a junk publication so you just call them a junk publication and move on. Jacobin is Breitbart on the other side of the spectrum. They don't deserve to be validated with discussion. That's my subjective opinion.