Pension funds are using average Americans’ retirement savings to fuel the financialization of our economy and concentration of oligarchic power in Wall Street’s hands. It doesn’t have to be this way.
Last month, conservative economist Oren Cass made a searing argument in the New York Times against the financialization of our economy. He offers many worthy ways to pull back from this abyss. Yet missing among them, and from his diagnosis of how we got here in the first place, is a strategy to address the primary source of capital that has fueled financialization from the start.
The primary source, tragically and ironically, is America’s public pension funds, which currently hold $6 trillion in assets, nearly all of which flow through Wall Street middlemen who generate enormous fees investing these funds to try to beat the market net of their costly fees. Ultimately, as Cass makes plain, they suck value from our public pension funds instead of adding it. This capital comes directly from the paychecks of public school teachers, nurses, firefighters, frontline government workers, and other public sector employees, and from the pockets of taxpayers who fund the majority of pension benefits in the form of property and income taxes.
It is the administrators of these pension funds — little known and under-scrutinized elected officials and government appointees called “comptrollers,” “treasurers,” and “trustees” — who have provided the money to private equity and hedge fund managers that have driven this financialized economy. These private equity and hedge fund managers have to get their money from somewhere, and their largest and most dependable source is public pension funds. In other words, financialization and its destructive effects have been made possible at the expense of public employees and the American taxpayer.
This cycle represents the largest transfer of wealth that no one knows anything about: from ordinary taxpayers and working Americans to investment managers whose financial incentives are increasingly disconnected from the investors — read: us — they represent. In New York, we estimate that it has cost New Yorkers $59.1 billion in higher taxes over the past eighteen years to bail out the underperformance of the hundreds of investment managers paid to manage New York’s state and local pension fund. It is a cycle that, brutally, adds to the gaping income and wealth gaps between America’s haves and have-nots.
To rub more salt in the wound, these Wall Street middlemen don’t even do their job, as even my eight-year-old has figured out. They simply do not deliver the value they promise to add (after charging taxpayer-funded fees), which is to beat their market benchmarks net of the fees they extract from investors. Since the dawn of modern finance, these managers, on average, do not beat the market — and even when they do, they don’t succeed enough to cover their high fees. And yet, in New York, despite not doing their job of beating the market, these investment managers were made millionaires — receiving a collective $11.3 billion in taxpayer-funded fees over the past eighteen years.
The financialization cycle, funded by public dollars, leads to more than just the transfer of wealth from taxpayers and workers to the ultrarich; it quietly concentrates economic power. This destructive cycle strikes at the heart of our democratic system and who we are as a country, dragging us further away from the democratization of political and economic power.
These anonymous administrators of our public pension funds — comptrollers, treasurers, and trustees — outsource our economic power to investment managers who enrich themselves and use the power and money gained off the backs of taxpayers and workers. And they do so while funding investments — often at odds with the interests of working-class people — which are frequently in private markets and therefore inaccessible to the average American.
Rather than outsourcing our economic power to these investment managers, we can cut out the Wall Street middlemen entirely and instead invest directly into the economy using diversified, low-cost index strategies. Doing so would allow public pension funds to achieve a higher return at a lower cost to taxpayers and public employees, cut off the biggest source of financialization there is, and stop the largest wealth transfer in America hiding in plain sight. Public pension fund administrators ought to examine the possibility. In doing so, these administrators can lead the charge in reversing the financialization of our economy that is destroying the very people they are supposed to serve.