Key elements of America’s ruling class think you’re not giving enough money to Wall Street, so they have a plan to force you to give more. The so-called James-Ghilarducci plan would force workers to pay a new three percent payroll tax to fund a personal retirement account to be managed by Wall Street firms. The cost to workers would be partially offset by a tax credit of up to $600, and the government would (somehow) guarantee at least a 2 percent annual return, regardless of market conditions.
The plan is being pushed by Blackstone president Tony James, who just by coincidence also happens to be raising millions of dollars for Hillary. As a result, Hillary’s top aides are reportedly warming to his plan.
You have to be a fool to think that James is doing this out of goodwill and public spiritedness. The plan promises to provide firms like his with a huge spigot of cash for accounts on which the firms will charge lucrative fees.
Right now, laws prohibit retirees from investing 401(k) balances in risky and sometimes opaque ‘alternative investments’ offered by hedge funds and private equity firms. Maybe that restriction should be lifted, but James’ plan forces savers to participate.
Chris Tobe, a Democrat who advises institutional investors and who served on Kentucky’s pension board, put it just as bluntly: “James’ plan is a deliberate attempt to get around federal protections for retirees because alternative investments are not generally allowed in the 401(k) world. This is about making Blackstone and other private equity firms even richer than they already are.”
The most objectionable aspect of the James-Ghilarducci plan is its coercive nature. The retirement accounts would be mandatory, and workers would be forced to pay a new three percent tax. A typical household making $60,000 per year would have to cough up $150 every month. Maybe you had other plans for that $150, but the plutocrats have decided they know better; you have to hand the money over to Wall Street.
Worse, under the plan, individuals don’t even get to decide how their own money shall be invested. People can’t choose for themselves how to allocate their own portfolio. That will be decided by the plutocrats.
Under their proposal, “Retirement portfolios would be created by a board of professionals who would be fiduciaries appointed by the president and Congress,” James and Ghilarducci wrote in a New York Times editorial.
James is trying to sell the plan by promising real returns of 6 or 7 percent. In an economy that can’t manage even 3 percent growth, that promise is simply not realistic.
[E]conomist Eileen Appelbaum told IBT, the James-Ghilarducci plan is built on earnings projections that are fanciful.
“The plan’s promise of 6 to 7 percent returns is likely to prove unrealistic, and they fail to discuss the risks inherent in the risky investments that would have to dominate the savings portfolio that could yield such returns,” said Appelbaum, who co-authored the book “Private Equity at Work” and published a study suggesting lower private equity returns are a new normal.
“This proposal is about Wall Street getting more assets under management because that is where they make their money,” she said.
I also fail to see how government could conceivably guarantee the balances. The tax would generate something like $300 billion per year flowing into the new accounts. After one or two decades, the accounts would contain several trillion dollars. And these funds would largely be invested in assets that are relatively risky. In fact, investing in riskier assets is the whole point of the plan, which is to open up risky asset classes that are currently unavailable to 401(k)s. If we experience a crash like we did in 2009, and asset prices fall by 50% or more, the government would be on the hook for trillions in bailout money. Where would that money come from?
The other problem with the plan is that it would increase corruption by furthering ties between Wall Street and government. Wall Street would benefit from a steady source of cash, but the political class would get to dictate the terms of the deal to Wall Street. The government would decide how much Wall Street could charge in fees, and maybe even which firms could receive the cash. Government influence might also politicize the allocation of credit, which in the long term would impair the efficiency of financial markets and the growth of the economy.
What will happen, of course, is the same thing we saw with health care and pretty much every other part of the economy these days. It will be a bust out. The billions that pour into these new funds will be “invested” in things that benefit the rulers. Politicians will get advance notice on some new move so they can cash in their privileged status. The fund managers will kick back a piece of their rake to the politicians for the right to manage these funds. It will be systematic robbery of the middle class.
Will the plan be enacted? Hillary has not been campaigning on it, and when asked to comment on the article excerpted above, her campaign declined. So they won’t even talk about it. But if they don’t talk about it now, during the presidential campaign, then a future Clinton administration will have no political legitimacy for imposing it on the people. A policy change this significant should be debated during the campaign so that voters can have their say. To keep quiet and then spring the plan only after the election would betray the principles of representative democracy. That’s not to say it won’t happen, but if it does, it would be politically illegitimate.