Elite corruption and lying about retirement saving methods is sure to end retirement for large numbers of the US population. However, the retirement for the wealthy will be better than ever.
Retirement Privatization = Stealing Retirement
The history of retirement fund privatization is clear…it is a total failure. However, failure does not stop monied interests from attempting to push it, because as Chomsky says, “the population is considered irrelevant.” Retirement funds have been heavily privatized in the US, and the defined pension is becoming uncommon. Its important to understand who is driving retirement fund privatization, as well as who wins and who loses from this change.
When Did This Begin?
The United States has been on a retirement fund privatization tear since the early 1990s. Up to this point (2007) the privatization has been limited to private investment accounts. However, the Bush Administration has been attempting to push through Social Security privatization. Few companies offer pensions newly joining employees. Unfortunately there has been no research disseminated to determine whether privatized retirement funds are adequate replacements for defined pension benefits. The decision to change the entire US retirement system was made on an ad-hock basis and driven by corporations with very little input from the public and very few limitations from the government. Furthermore, the final output from this conversion in retirement policy has not yet played out due to the long lead time between the policy’s introduction and when people covered under 401k programs reach retirement.
What the Research Shows
Unpublicized research demonstrates that the 401k program are a giant leap back for the majority of Americans. In fact, the move towards 401ks have extremely negative implications for the vast majority of America ’s retirements (details here). Outside of the US, other countries have had similarly undesirable outcomes, yet these facts have resulted in very little media coverage. One country which engaged in retirement fund privatization was Argentina. According to the Center for Economic Policy Research, Argentina’s experience was one reasons for the severe economic crisis which the country experienced in 2002. (details here) The privatization of their retirement system deprived Argentina of critical tax revenue. The financial crisis was very poorly covered in the US, most likely because US financial interests (The International Monetary Fund, World Bank and large US banks among others) were partially to blame for the crisis. The IMF and World Bank are very powerful institutions which have a strong unearned legitimacy US media outlets. Because of this, few people know that the World Bank directly reports to the Department of the Treasury. By ignoring the underlying reasons for this story, the media deprived US citizens from learning from Argentina’s mistakes.
Results of Retirement Fund Privatization
Proponents of retirement fund privatization, which is primarily large investmen banks and mutual funds (as well as their political surrogates that receive campaign contributions from them) leave out a number of critical items when they discuss the subject of privatizing retirement funds. You will never find these issues or facts discussed on a 401k brochure or on a company’s website.
Critical Facts
The organizations supporting privatization intend on making significant fees off of the movement o funds from either government hands or pension funds to their accounts. This is for the following reasons
- Employers like 401ks not because they are good for employees but because they reduce the employers contribution to their em loyees retirement. Employers contribute roughly 1/2 what they did under the older defined benefits pension programs. (401k costs employers roughly 1 to 2% of payroll, while defined pensions cost roughly 8% of payroll)
- 401ks transfer the investment risk from the employer to the employee. Employers are washing their hands of their responsibilities to employees. If the employees investments do well, the employee may do well, if their investments o not do well, their retirement may be short-lived.
- A number of companies have violated the law by skimming their pension funds during periods of strong stock markets only to find them underfunded when the stock prices normalize. This pract ce could easily be stopped if executives were prosecuted. Sadly this rarely happens.
The history of privatization of retirement funds is abysmal. it is not just abysmal in the US, but in every country that has tried it.
Pick a country, no matter where retirement privatization has been performed it has provided retirees with less income, but has enriched corrupt elites. This is why corrupt elites in the US want to roll it out in the US.
The Actual Case Studies
Specific Examples of the Abysmal History of Retirement Privatization:
- Argentina privatized its social security system, and this combined with very high interest rates were a primary reason for the Argentina financial crisis and subse uent depression. In addition to the macro-economic problems, social security benefits were permanently reduced. The IMF attempted to use Argentina’s financial crisis, which was primarily due to the IMF’s power centered policies to implement a shock doctr ne strategy to introduce policies beneficial to monied interests. After the the damage was done the IMF attempted to pushing through policies even more hurtful to the economy, (called “Shock Therapy”) which would have made Argentina more reliant on the IMF and money centered interests. Argentina wisely rejected these policies and righted its economic ship by doing the exact opposite of what the IMF recommended. The IMF and World Bank have been punishing Arg ntina ever since in their publications by under-representing Argentina’s growth since the crisis and doing whatever they can to get Argentina blacklisted from the sources of international capital.
- The British privatized their social securit system back in 2005. The British now have the stingiest government pension system in the G8 “Back in 2002, many U.K. insurance companies, mindful of tough new rules against giving bad advice, began to write to their customers urging them to consider abandoning their private savings and returning to the state pension system — something hund eds of thousands of Britons have done already.” – http://www.prospect.org Much like how the 401k (pension privatization) was introduced and how the attempts at privatizing Social Security have left out critical information from the national discussion “neither the voting public nor most politicians understood the implications” Britain’s privatization is considered a failure. However, Britain has a strong private pension system, something the US does not have.
In all, eleven countries have privatized their social security systems, lead by Chile which privatized back in 1981. These case studies include Mexico, Canada, Sweden, UK, and Argentina. There are simply no good stories from countries that have gone through privatization. The issue of retirement fund privatization is presented in the US as if it is a new issue precisely because the old examples that could be referenced are all negative.
Facts About the 401k Program
The US has already privatized part of its retirement system when it opened a loophole in the tax law called section 401k. Few people know that the 401k was originally intended as a way for executives to shelter income. However, since then, the 401k has rapidly replaced pensions at companies. Companies love them because they only contribute around 1 to 2% of payroll while defined benefit pension used to cost them 8% of payroll. The fact that the 401k program is voluntary, and that middle lower income earners receive substantially lower returns from 401k programs (see here for details on 401k returns) than the top income groups means that very large numbers of our population will not have enough money to retire and will have to work until they are unable to work any longer…or will become burdens on their children.
The Effect of Heavy Propaganda from Concentrated Financial Interests
Concentrated financial interests have spent the past two decades attempting to build up a case for the privatization of Social Security (according to the Center for Economic Policy Research) What is so offensive to Wall Street about Social Security is that its administrative fees are so small, roughly .5 percent of assets under management. Wall Street could significantly increase the administrative costs and correspondingly increase its profits. This steady drumbeat for privatizing Social Security is communicated through conservative think tanks which are able to have their articles published in establishment outlets like the New York Times and the Washington Post. The result is that there are a large amount of articles circulating in print and on the internet which are pure propaganda. Furthermore, this propaganda goes completely unchallenged by the main stream media. See this exerpt from Time Magazine’s expose on retirement rip-offs.
One of the few major articles on the systematic theft of retirement funds by executives from workers.
Perhaps the best yardstick to assess the outlook for the later years is the defined-benefit pension, long the gold standard for retirement because it guarantees a fixed income for life. The number of such plans offered by corporations has plunged from 112,200 in 1985 to 29,700 today. Since 1985, the number of active workers covered in the private sector declined from 22 million to 17 million. They are the last members of what once promised to be the U.S.’s golden retirement era, and they are fast disappearing. From 2001 to 2004, nearly 200 corporations in the FORTUNE 1000 killed or froze their defined-benefit plans. Most recently, Hewlett-Packard, long one of the most admired U.S. companies, pulled the plug on guaranteed pensions for new workers. An HP spokesman said the company had concluded that “pension plans are kind of a thing of the past.” In that, HP was merely following the lead of business rival IBM and such other major companies as NCR Corp., Sears Holding Corp. and Motorola. The nation’s largest employer, Wal-Mart, does not offer such pensions either. At the current pace, human-resources offices will turn out the lights in their defined-benefit section within a decade or so. At that point, individuals will assume all the risks for their retirement, just as they did 100 years ago – Time Magazine
And then there’s Leo Mullin, the former chairman and CEO of Delta Air Lines. Under Mullin’s stewardship, Delta killed the defined-benefit pension of its nonunion workers and replaced it with a less generous plan. Now, little more than a year after he retired, the airline is in bankruptcy and can dump its pension obligations. But you need not fret about Mullin. On his way out the door, he picked up a $16 million retirement package. It’s based on 28.5 years of employment with Delta, at least 21 years more than he worked at the airline. - Time Magazine
Retirement Privatization = Investment Banking Fees + Lifelong Work
Large investment companies are fully aware of both what happened in Argentina, Britain, Chile, Mexico, Canada and Sweden with regards to retirement privatization. They also certainly are aware how poorly performing and unsustainable the present 401k system is for 80% of US workers. They know this because they maintain the databases for millions upon millions of retirement accounts; and they know the typical return on these accounts is abysmal. However, they have not made the statistics from this database available to the public. The government also knows but chooses to remain silent on the topic. However one independent retirement program consultant has made this information public. Brooks Hamilton is a consultant who has for several decades migrated companies from defined pension systems to the cheaper (for the employer) 401k program. After decades as a retirement program Brooks Hamilton has amassed a database of 401k performance data. What he sees is not pretty. His research shows a massive yield disparity in 401k accounts between high income and low income earners. Because the 401k is so valuable in saving companies money, the actual returns are never published by the investment management companies. If these results were known there would be a revolt against the 401k retirement system and a call for a return to defined pension benefits. Furthermore the discussion regarding privatizing Social Security would disappear from the national stage. In order to test this theory, try to remember the last time you saw research published on the real returns of 401k programs. This is clearly an important subject and research to investigate all sorts of less important things are funded on an hourly basis in the country (i.e research into hydrogen fuel cells, a technology for which no fuel source exists). However, the actual return of 401ks appears not warrant research. Typing a search about 401k returns into Google returns a number of search results related to how to increase the returns or other links to investments sites, however nothing on the returns of of 401k programs. In fact research of this type is neither funded nor published.
This is the future of retirement in the US….for the top 1% of the country. Much of the rest of the country won’t be retiring. For decades average people voted against their interests and against regulation and a fair and sustainable economy. We are curious if they will be bitter when they realize that everything they voted for and all the tolerance they showed for the “free market” only paved the way for their money to go towards the super elite?
Pensions
Pensions are not bulletproof, but primarily because they are raided by executives, which is greatly supported by the Republicans, and very little is done to protect them by the Demotrats. See this article for details.
http://counterecon.com/2009/11/09/raiding-pensions-and-the-pgbc/
However, pensions are still far better than 401k programs, not the least of which is because employers contribute twice as much under them than 401k programs.
Conclusion: The Solution to Retirement Policy Planning is Simple – Reverse the 401k Program
The data is in and the answer is crystal clear. Privatization means higher administration fees and more corruption with few people having real retirements. Not only should social security not be privatized, but the following should occur. Pensions should be brought back and the fraudulent and misleading 401k program eliminated with the management of the current retirement funds in these accounts transferred to a defined benefit pension system. The 401k program was the result of accidental legislation and it was never intended to replace pensions. Its time to admit this. Its time to tell people the truth about the history of the 401k as well as its real world results thus-far. The 401k program is a failure. The investment companies should be removed from decision making and political influence in retirement management. They are simply too biased and have no public interest function or concept of social responsibility. Their short term incentives and scandalous track record make them manifestly inappropriate for guiding and shaping national discussions on retirement policy making.
References
Interesting article from Global Research on how 401ks were a scam
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At the end of September, just as the crisis was beginning to gain steam, it was discovered that in the previous year the value of stocks in 401(k) accounts had fallen by nearly $2 trillion! Much more has been lost since then. This is especially devastating since almost one-third of 401(k) participants in their 60s had 80 percent of their money in stocks (pension funds have been similarly destroyed).
The 401(k) was the scheme of the century. Corporations offloaded their “burdensome” pensions and used the combined forces of the media and politicians to sell the ruse to the public, to the great benefit of Wall Street. Workers were told that the boom-slump cycle was over, and that stocks were a sure thing. There were additional factors to invest in stocks: interest rates were so low that investing in bonds and other less-risky instruments offered only tiny returns; and since employers stopped contributing to retirement funds, a bigger return was required.
More importantly, corporations have been driving down real wages since the seventies, allowing less money to be saved for retirement, creating a mood of desperation.
Every “safe bet” for investing has been proven unsafe; the recession has left nothing untouched. After the dotcom bubble burst — taking with it millions of people’s 401(k) savings — the housing market became the place to invest. Now the safest possible investment, too, has turned sour. For millions of people, the home they lived in was their nest egg, which they had planned to sell and move into a smaller place. No more.
Rep. Robert Andrews (D-NJ), who chairs the House subcommittee on health, employment, labor and pensions, put it bluntly: “Some will have very little, some will have almost nothing, and some will have nothing when they retire”. Of course, people who “have nothing” do not retire.
This process is being accelerated by the newest trick of big business: declaring bankruptcy to destroy “pension obligations”. These obligations apply with equal weight to workers already retired, many of whom are seeing their pensions slashed in half, forcing them out of retirement.
I found this from D&S
“Ideological opposition to “big government” and redistributive policies is one reason why right-wingers are pushing privatization. But its backers are mainly large Wall Street companies. They stand to gain $240 billion in fees within the first 12 years of a privatized system—enough for 20,000 managers to make annual salaries of $1 million each”
http://dollarsandsense.org/archives/1998/1198weller.html