Another rotten retirement scheme from a Wall Street front group

Another rotten retirement scheme from a Wall Street front group
She wouldn't buy a scheme like this: Sen. Elizabeth Warren (D-Mass.) has been fighting to expand Social Security. (Stan Honda / AFP Getty Images)

Two founders of Third Way, a Washington think tank that carries water for Wall Street by pretending to be a "centrist" organization, have come out with a new proposal for a mass retirement program that, yes, will line Wall Street's pockets while promising the average worker something it can't deliver.

The promoters are Jonathan Cowan and Jim Kessler, who last surfaced in December with an attack on Social Security in the Wall Street Journal that we noted was brimming with misrepresentations and untruths.


Their new proposal to "capitalize workers" appeared over the weekend in the New York Times. (They do get around.) Their theme is that raising the minimum wage is all well and good, "but if the goal is to materially raise living standards for every American worker, we should also be calling for a minimum pension." Properly structured, they say "this would not only create real wealth for the middle and working classes, it would use the power of financial markets to reduce wealth disparity." 

A couple of points right off. We already have a minimum pension program. It's called Social Security, and since Cowan and Kessler have been running around claiming (incorrectly) that the program is in an "undebatable solvency crisis," we should be very wary about whatever claims they make for how their idea is better.

One clue is their confidence about using "the power of the financial markets" to make the middle and working classes rich. We've heard this before, and it's always a prelude to bankers and brokers getting their mitts on our money. This time is no exception. So let's turn a spotlight on the Cowan/Kessler scheme.

The heart of their plan is a mandate that every employer place a minimum of 50 cents per hour into an IRA for every employee. The money would come to about $1,000 per year.

The first bit of sleight of hand here is the implicit suggestion that this contribution would all be the employer's dime (or five dimes). That's not the way things work. Hornbook economics says that such benefit contributions are effectively paid by the employee, whose cash compensation is reduced accordingly. (That's how economists account for the employer's match of Social Security taxes, for example.) As Dean Baker observes, for a low-wage worker earning $10 an hour -- the putative target for this scheme -- the 50-cent contribution is an effective tax of 5%, which is "not exactly trivial."

Where would the money go? According to the Cowan/Kessler specification, into a "privately run low-fee" mutual fund. Why should this account be privately run? Presumably because the fees from managing many millions of accounts, even if "low," would run into the billions of dollars a year, out of your pockets and into the maw of the private financial services industry.

The authors paint a picture of the wealth to be created this way in gratifying shades of gold. If the contributions grow at the average rate of the stock and bond markets over the last 45 years, they say, one's nest egg would come to $160,000 at the end of a 45-year working life. 
But there's a lot of positive thinking in that calculation. Positive thinking is a big factor in get-rich schemes like this. It assumes away market events like the crashes of 2000 and 2008, which could destroy the investors' nest eggs if they came at the wrong moment (as they often do). It assumes not merely low fees, but almost no fees, which could erode the accounts deeply over time.
And it assumes away the fees for annuitizing the eventual nest egg, which would again go into the money men's pockets. Thinking optimistically, that $160,000 lump sum might produce $400 to $500 a month in retirement payments. But then there's inflation and the cost of covering a spouse who might outlive the breadwinner. Someone will come out ahead, but the deck is stacked against it being the account holder.
So what's the alternative? This scheme by Cowan and Kessler looks like it's really aimed at counteracting the growing movement to expand Social Security, which outdoes this plan in every way. Its monthly payments are guaranteed to last a lifetime plus the life of the recipient's spouse. The payments are inflation-protected. The program isn't managed privately, which should give you a clue to why Wall Street and its handmaidens at Third Way are so sour on it.  

As the retirement experts at Boston College have found, the risk of inadequately funded retirements increased for Americans at all income levels after the Great Recession. But the lowest-income households fared relatively better than others, because their retirements are tied more closely to Social Security than anyone else's -- and that's the benefit stream least affected by market collapses. Third Way's Cowan and Kessler want to load up more of that market risk on low-income workers in the name of "capitalizing" them. If you're a working person, you should shudder in fear.