Wall Street’s Takeover of American Pensions: ‘A Policy Justified Entirely on Ignorance’

A key part of Wall Street’s $300 million expenditure on the recent midterm elections is the goal of moving as much of working Americans’ $3 trillion that sits in unguarded government pension funds into “privately managed, high-fee investments” as possible, Murtaza Hussain writes at The Intercept.

Hussain reports:

Illinois, Massachusetts, and Rhode Island all recently elected governors who were previously executives and directors at firms which managed investments on behalf of state pension funds. These firms are now, consequently, in position to obtain even more of these public funds. This alone represents a huge payoff on that $300M investment made by the financial industry, and is likely to result in more pension money going into investments which offer great benefits for Wall Street but do little for the broader economy.

But Wall Street’s agenda goes beyond any one election cycle. It has been fighting to turn public pensions into private profits for quite some time, steering retirement nest eggs into investments that are complex, charge hefty fees, and that generate big profits for management firms. And it has been succeeding. Of the $3 trillion in public assets currently in pension funds throughout the country, almost a quarter of that has already found its way into so-called “alternative investments” like hedge funds, private equity and real estate. That translates to roughly $660 billion of public money now under private management, invested in assets that are often arcane and opaque but that offer high management and placement fees to Wall Street financiers.

… In many cases, the decision to invest state pension money in alternative investments of questionable value seems to have been driven less by concern for the welfare of future pensioners (gasp!) than by political considerations and the concerted efforts of financial industry lobbyists. The simple fact is that these investments are not very good. While they offer lucrative fees for Wall Street middlemen, they have been shown to often significantly underperform against the market.

In addition to putting pension funds at risk, the flow of public money toward Wall Street “fundamentally alters the future shape of American society by changing how public funds will get spent,” Hussain writes. It’s money that could be spent on public projects that benefit local communities. To give an example, Hussain quotes assistant professor of sociology at Marquette University Michael McCarthy, who describes how Quebec’s pension investment fund has contributed to the regional economy:

The fund invests in small and medium enterprises that operate within the province. According to their calculations, by 2012, the Solidarity Fund’s investments created 86,624 new jobs and kept 81,993 more from moving overseas.

Pension funds could play a similar role in America, but they don’t. Instead, U.S. pension funds mimic Wall Street investment practices.

Hussain concludes by quoting a former congressional staffer with ties to the investment industry: “There is a massive transfer of power and wealth happening from the public to Wall Street, through pensions. … The more that money goes into private hands as opposed to public hands, the less that it gets invested into projects which are socially constructive.”

“It’s a policy justified entirely on people’s ignorance of what’s going on.”

Read more here.

— Posted by Alexander Reed Kelly.