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13.
The Conservative Takeover
of Social Security
Consider
this. If an American worker
§ has
a high school degree or less, and has worked hard all his life, or
he
§ has
a Ph.D. in physics, but he’s fifty and suddenly finds that his job has
been subcontracted out to India, or he
§ is
an engineer who has been “downsized,” and has spent his life’s savings to
find a new job and to put his kids through college,
§ he
can still count on having at least a bare-bones income for retirement
because of our present, reliable Social Security
system.
Social
Security is an effective, efficient system for ensuring a decent
retirement income for working Americans. Fundamental to its success is its
philosophy that hard work is honorable, it contributes to our nation’s
prosperity, and those who do it should be able to count on, at least, a
minimally comfortable old age.
Under
our present system, those who work hard don’t have to have greed or
materialism as their primary or even secondary motivations. They don’t
have to spend significant amounts of their time studying ways to get
wealthy, to play the stock market, or to hoard real estate.
They
can focus their efforts on their life’s work, whether that work is
designing bridges, healing the sick or collecting garbage. Workers
“invest” in the future by inventing, building, and maintaining this
country—usually for relatively low incomes—and by having a Social Security
system that properly recognizes their right to a decent income after they
retire.
Our
system also assumes that today’s workers will be able to make enough money
to provide a retirement for those who preceded them—just as those who
preceded them had paid for the retirements of their predecessors. Of
course, trust funds have to be built up during prosperous times to make up
for anticipated imbalances that may occur because of changing birth and
retirement rates.
Conservatives
want to change all that. The greed and materialism inherent in their
philosophy places a premium on inherited wealth, investment income without
work, and the manipulation of the markets that restrict workers’ wages.
That is the way they “invest” in the future—for themselves and their own
descendant royalty.
The
most immediate beneficiaries of their transparent plans for “saving Social
Security” will be Wall Street brokers, bankers, lawyers, everyone
associated with the securities industry, and all those who already own
massive amounts of stocks and bonds. If Alan Greenspan thought the market
was overvalued in 1998 and ’99—wait until billions upon billions of
government sponsored dollars hit the stock markets. The wealth of the
already wealthy will soar as never before.
As
is well known by now, the top 1% of Americans own 46.2% of all stocks and
54.2% of all bonds. The top 10% of Americans own 90% of all stocks and
bonds. The bottom 70% of Americans own from $0 to $2,000 in securities; in
today’s economy, that effectively translates into virtually no appreciable
investment in today’s stock market.
Raising
hypocrisy to a new level of sophistication, conservatives have gained
respectability for privatizing Social Security by saying that workers
should have the same opportunities to invest in the stock market as rich
people do, and to realize the same benefits.
But
what conservative politicians really want is to
§
provide
vast sums of money to propel the stock market to ever higher levels, thus
making present stockholders (themselves) even more
wealthy,
§
return
favors to many of their biggest campaign contributors—the securities and
banking industries,
§
force
people who don’t know the difference between a stock and a bond to compete
in the financial markets with those who have made Wall Street, and the
accumulation of money, their life’s work, and to
§
politicize
the Social Security process; that is, enable politicians to decide which
of their friends will handle workers’ investment money.
In
other words, conservatives want to create a new Social Security system
with horrendous service charges (Wall Street firms, lawyers, brokers,
analysts, investment bankers, advertising executives, accountants, etc.)
for what is probably the most cost-efficient governmental system in our
country. In 1997, Social Security paid benefits of $362 billion. The cost
for administering the program was $3.4 billion, or only about .9% of
benefits paid.
This
is not to say that the system itself couldn’t make better investments than
in conservative government bonds. However, whatever changes are made
should give the same guarantees to retirees as they now have—and the Wall
Street sharks should be kept out of the process as much as
possible.
Carrying
their blatant attack on working Americans further, Congress has raised the
retirement age to 67 years, and some want to increase it to 70 years.
This, at a time when the bodies of many manual laborers wear out before
they are 60.
Naturally,
those who are best able to work until they are 70 are those who never
really worked with their bodies to begin with: investment bankers, college
professors, stockbrokers, management consultants, corporate executives,
lawyers, accountants, and so on. These are the very same people who paid
their politicians to raise the retirement age, instead of raising taxes on
themselves—the ones who are benefiting most, and sacrificing least, in
today’s economy.
To
get a better understanding of this subject, consider what our most
prestigious conservative financial publications have to say about the
nature of investing in Wall Street. If Social Security is privatized, it
won’t be easy for workers to be successful, especially for those who lack
a good financial education.
On
the other hand, it will be incredibly easy for them to get taken for a
disastrous ride by the army of stockbrokers who will crawl out from under
the rocks to partake of this new bonanza.
Look,
for example, at two articles from the well-regarded investment
publication, Fortune magazine.
Under the head “Even If You’re a Millionaire, Good Advice Is Hard to
Find,” it gave an unvarnished assessment of what it takes to make money on
Wall Street:
Arthur
Pergament’s family did him in. He was just 27—a scion in place in his
ancestral business—when his father and uncle sold Pergament Home Centers
to a leveraged buyout firm in 1987.… In practice, Arthur Pergament was
left without a job. In fact, all he had left was his family’s millions in
cash.…
Nine years later he still
steams with memories of how big-money managers proposed to treat his
precious stake. “When you’ve
got $10 million or less, you deal with some guy making $60,000 who’s
trying to institutionalize you,” he says.… “You get lost in the
soup.”1
A
month later, Fortune expanded
on the “it’s-hard-to-get-good-investment-advice” theme by describing “How
to Pick Your Advisers”:
Don’t
leave it to luck. To keep your retirement plan from becoming a financial
nightmare, start assembling your financial experts now. Here’s how.…
Personal finance has gotten so complicated that no one can hope to prepare for
retirement without employing a large and rather expensive advisory team.
Says Roy Ballentine, a consultant who assembles such teams: “We long ago
concluded you’ll never find a single expert with all the
answers.”2
If
sophisticated readers of Fortune, with excellent financial
backgrounds, need
to be concerned about how to invest for retirement, what does this suggest
for those who cannot afford to make any mistakes at
all?
So
what’s a typical worker to do, when he doesn’t have enough money to hire
an investment advisory team? Great news. Free advice will be available.
When Social Security is privatized, millions of people will suddenly have
free advice cascading down upon them—around dinnertime, of course. The Wall Street Journal gave us a
glimpse of what is in store in its article, “‘Buffett Is Buying This’ And
Other Sayings of the Cold-Call Crew”:
When
the stockbroker called, Robert Gaddis wasn’t interested. He knew all about
cold-callers and their high-pressure push to buy speculative stocks. Yet
the Illinois insurance man says he eventually ended up sinking $6,000 into
a little-known stock through the broker, and losing nearly all of it.… An
underground collection of audiotapes circulates among young brokers
showing how veterans of the boiler-room business repeatedly woo and win
clients against high odds.3
Cold-calls
from stockbrokers is just one of the downsides that privatization will
lead to. For many of those planning for retirement—who don’t know the
difference between a stock and a convertible bond—the challenges will be
overwhelming. Conservative investors will have to select a good mutual
fund from among the thousands available, and their luck may largely depend
upon which salespersons first contact them. Aggressive investors who
decide to try to hit the stock market jackpot will gamble their futures
with brokers who promise them the greatest returns in the shortest time.
The
following references to separate articles need no further comment about
what conservatives want to exchange our efficient Social Security system
for:
“Sleazy
Doings on Wall Street …Why did prestigious Bear, Stearns get cozy with so
many discredited bucket shops?… In failing, Baron [bankrupt brokerage
company] laid bare a corner of the securities industry that is rarely seen
but is hugely profitable: processing trades for other firms.… The whole
situation stinks.”4
“Brokers
don’t usually push closed-ends, since the commissions are low, and fund
companies opt to spend ad budgets on mutual funds which can generate
higher fees. Perhaps for this very reason, savvy investors should consider
closed-end funds for their portfolios.”5
“The
$700 Million Mystery …Big brokerages may have propped up David Askin’s
funds.… Did some of Wall Street’s biggest brokerages—notably Kidder,
Peabody & Co.—help Askin mislead investors? Did Kidder and other firms, such
as Bear, Stearns & Co. and Donaldson, Lufkin & Jenrette Securities
Corp., improperly force his demise? Do they share in the potentially
enormous liability—investor losses that exceed $400
million?”6
“Retired
Americans Should Be on Guard Against Abuse From Financial Advisers
…Regulators say the culprits run the gamut from brokers with well-known
firms to financial planners who work out of their homes. ‘Seniors are
being targeted and scammed,’ says Michael T. Kogut, Massachusetts
assistant attorney general for elder protection.”7
“Wall
Street’s biggest ever ‘test-taker-for-hire’ scam could be more organized
than originally believed. As expected, the Manhattan district attorney’s
office yesterday announced the indictment and arrests of 53 stockbrokers
for cheating on broker-licensing
examinations.”8
“Beware
the Scalpers …As often as not, funds the independent brokers sell carry
famous brand names: Oppenheimer, Putnam, Franklin. Wrapped around these
funds, however, is a latticework of extras such as ‘timing services’ or
consultation fees that can easily create a combined expense burden topping
4% of assets annually.”9
“How
One Stockbroker Keeps On Selling, Despite Complaints …[H]e is just one of
112 individuals still active in the securities industry even though they
have been on the losing side of two or more customer arbitrations from
1991 to 1995.… This, critics say, is an extraordinary record of survival
in an industry that claims its self-policing methods amply protect
investors.”10
“The
government’s case against Mr. Wolfson, they say, underscores one of the
principal perils of today’s markets: Promoters are hyping small stocks and
unloading them on a new generation of bull-market investors, flouting the
civil penalties and other traditional techniques available to
regulators.”11
“Investor
beware. A big chunk of the money you sink into small stocks may be lining
your broker’s pocket. Within the broad community of Nasdaq Stock Market
dealers, many brokerage firms that make markets in smaller stocks are in
the habit of paying their brokers extra money to sell them, regulators
say.”12
“Unusually
heavy trading in Fund American Cos. Stock and options before yesterday’s
announcement of the sale of its insurance unit to Allianz AG suggests
there was trading on inside information as early as three days before the
deal was disclosed.… ‘Greed is as American as apple pie,’ said Bruce
Baird, former chief of the securities and commodities fraud unit in the
Manhattan U.S. attorney’s office.”13
“When
Michael R. Milken’s junk-bond market fell, some of America’s flashiest
wheeler-dealers went down with it. The collapse also snared Sara Webb. The
73-year-old Tennessee widow lost almost half of her $20,000 investment in
Memphis municipal bonds, which turned out to be tied to the sinking
fortunes of junk bonds.”14
“The
activities of Prudential Insurance and its brokerage unit present a case
study in how a stodgy corporate image can sometimes mask a far more
aggressive reality. What irks many investors now is the Prudential
Insurance was used as a major marketing tool in promoting the Pru-Bache
partnerships.”15
“A
three-month investigation reveals that organized crime has made shocking
inroads into the small-cap stock market.… Today, the stock market is
confronting a vexing problem that, so far, the industry and regulators
have seemed reluctant to face—or even acknowledge. Call it what you will:
organized crime, the Mafia, wiseguys.”16
“‘In-House’
Trades Can Be Costly for Small Investors …[T]he Wall Street stock trader
sounds a little sheepish. ‘It’s like taking candy from a baby,’ he says of
his job, in which he fills small-investor orders at not-always-the-best
prices.… It’s typically quite legal, though small investors usually aren’t
aware of it.”17
“The
Rich Have Their Own Means of Staying That Way …While these small stocks
are volatile, wealthy clients have the ‘fiscal fortitude’ to tough out the
ups and downs, says Mr. Elliott. In contrast, he says, the typical small
investor usually bails out at the first sign of a downturn.”18
“Short-Sellers
& The Seamy Side of Wall Street …It’s a tale of skullduggery and
possible extortion… Add to this pungent recipe greed, fear, and
dishonesty, and also cameo appearances by celebrities from Dan Dorfman,
whose TV broadcasts helped out the shorts, to baseball tycoon George
Steinbrenner III, who was one of 66,000 brokerage customers unhappily
caught up in the action.”19
“Fund-Industry
Trade Group Picks a Lemon …Dean Witter InterCapital decided last month to
take the unusual step of liquidating Dean Witter Premium Income Trust
because its assets ‘have steadily decreased over the past several years.…’
Such funds, like Dean Witter Premier Income, are supposed to be havens.
They buy government bonds and other securities that are considered
low-risk.”20
“Banks
and the investing public gave Dino DeLaurentiis nearly $200 million to
build a film company. The money is gone and the company in ruins, but some
of Dino’s friends and relatives aren’t hurting.… Enter Paine Webber. If
the industry wouldn’t finance him, the public would.… [T]he brokerage
house raised $107 million for De Laurentis, selling stock, junk bonds and
units of a limited partnership.21
“Nearly
three dozen Wall Street securities firms have begun preliminary settlement
discussions with the Securities and Exchange Commission over alleged
trading violations in the past on the Nasdaq Stock Market.… Among the
firms that the SEC has held settlement discussions with are Merrill Lynch
& Co., the nation’s biggest brokerage firm; Morgan Stanley Dean Witter
& Co., Paine Webber Group Inc.; Warburg Dillon Read,…and Charles
Schwab Corp.’s Mayer & Schweitzer Inc. unit.”22
“It’s
one of Wall Street’s best-kept secrets: While securities firms allow big
institutional investors to dump hot new stocks at their whim, often within
hours or minutes of the stock’s first trade, they try to persuade
individual investors to hold on to IPOs (initial public offerings), for
better or worse.… ‘While institutions are dumping IPOs, retail [small
investors] is stuck holding the bag,’ says Lori Dennis, a former Merrill
Lynch & Co. broker.”23
“Although
no one knows exactly how many investors aren’t getting the money they are
due, plaintiffs’ attorneys say the number of unpaid arbitration awards has
been rising in tandem with the growth of small firms that specialize in
highly speculative small-company shares.”24
“401(k)
Do-it-yourselfers Could Use Some Help …The rise of 401(k)s requires
workers to pony up not only the money they’ll need for retirement but the
time and effort to fathom Wall Street’s Mysteries. For vast numbers,
that’s one burden too many.”25
“The
SEC Should Keep Fund Managers Honest …Michael L. Schonberg has been put on
paid leave while at least three investigations—including the FBI—probe his
personal ownership of penny stocks purchased by his two ‘aggressive
growth’ funds. But no amount of investigating will resolve the thorniest
question raised by this mess: Should the Securities and Exchange
Commission require that personal trading by fund managers be disclosed,
restricted—or banned entirely?”26
“Don’t
Be a Victim …The bull market in stocks has bred a bull market in fraud.…
Because bull markets tend to push all stock prices up, many investment
frauds remain hidden. Only when the bull turns tail do these swindles come
to light. Bull markets just make people more gullible. They are more
likely to believe in miracles.”27
“Nationsbank
Corp. agreed to pay $6,750,000 to settle civil charges that its employees
deliberately misled investors—most of them elderly—in selling them two
risky bond funds.”28
“Just
how little many investors know about [mutual] fund fees became a hot topic
in May, when Securities and Exchange Commission Chairman Arthur Levitt
rebuked fund companies for building ‘unrealistic expectations through
performance hype’ and not providing enough information on fees and
expenses.”29
“‘Flat
Fee’ Accounts: Read the Fine Print …Brokers’ no-commission offerings may
have hidden charges.… It has been a problem since the dawn of the retail
brokerage business: Brokers have a strong incentive to get customers to
trade when it might be in clients’ interest to do nothing.”30
“Authorities
Probe Growing Wave of Stock-Market Touts …Here is something else for
investors to worry about: tainted financial advice. Stock gurus are
sprouting in increasing numbers on radio, TV, the Internet and in
newsletters and, according to regulators and law-enforcement officials,
more of them are getting paid under the table by executives of the
companies they tout.”31
“CFTC
Accuses 2 Firms of Fraud …ITG customers had losses of $428 million, while
ITG made $283 million in commissions between January 1984 and May 1989,
according to the suit. During the same period, Siegel made about $40
million in commissions, while its customers lost $33.6 million.”32
“Charles
Steadman is probably the most consistent mutual fund manager in America.
And that’s bad news. Three of the four mutual funds in Mr. Steadman’s
Steadman Group have lost money during the past five years of the bull
market.”33
“For
years seniors have been a target not only of scam artists trying to chisel
them out of their savings, but also of unscrupulous or not-so-bright
brokers urging inappropriate investments.”34
“You’d
think that with inflation in abeyance, high-fee commodity funds would be
gone. But there’s a sucker born every minute.… What’s wrong with these as
investments? Three things. They are dragged down by exorbitant fees, they
are usually very risky and they do a poor job of diversifying a stock
portfolio.”35
“Don’t
Panic. Social Security Will Be There For You …According to government
estimates, the Social Security trust fund will be perfectly solvent for
the next 32 years…. We’ll all hear plenty of scare stories between now and
2029 since fear mongering is a way of life in Washington. But truth be
told, there isn’t much reason to panic.… Gambling (with the future) may be
legalized. Wall Street is salivating at the prospect of investing even a
fraction of the half-trillion-dollar Social Security trust
fund.”36
“Wall
Street Wants the ‘Little Guy,’ and It Will Merge to Get Him …Blue-chip
investment bank Morgan Stanley Group Inc. and Dean Witter, Discover &
Co., a ‘retail’ brokerage house catering to individual investors,
confirmed that they plan a stock swap to create the nation’s largest
securities firm.… Driving it was a bid to snare the burgeoning assets of
small investors, particularly in mutual funds.… The merger comes as
several other Wall Street firms are looking at ways to reach small
investors.”37
The
last two excerpts are especially significant. Fortune (36) clearly admitted that
Social Security isn’t broken. The real reason for the Social Security
“crisis” is that the securities industry needs a new source of funds to
keep the stock market rolling. Washington’s new growth industry—privatized
Social Security—will be just another means of transferring wealth from
workers to sophisticated investors who know how to take advantage of the
unsophisticated.
And
no wonder “Wall Street is salivating.” Privatizing Social Security will
allow Wall Street—with its aggressive sales persons, fraud, greed,
corruption, incompetence, hidden fees, false advertising, and outright
lying—to take a huge cut out of the most efficient governmental program we
have.
The
Journal (37) described Wall
Street’s new strategy to get control of the assets of small investors,
which will dramatically increase if Social Security is privatized. They
not only will have a massive amount of investment funds—in total—they will
also be able to manipulate the small investor for their own benefit.
Financial institutions and wealthy investors will also be able to transfer
many of their risks and expenses to small investors, who have no
negotiating power.
Review
the previous excerpts from separate articles. Bear in mind that all of
them came from America’s premier conservative financial publications, and
not the “biased liberal news media.” Note that in all aspects of
investing—fees, IPOs, accurate information, and so on—brokers give
significant advantages to institutions and wealthy investors; the little
guy is always last in line and, if anyone’s account has to be sacrificed
for the sake of “the market,” it’ll be his.
For
another perspective about privatizing Social Security, look at the U.K.’s
experience during a prosperous economic period. The Wall Street Journal’s analysis, “Social Security Switch
in U.K. Is Disastrous; A Caution to the U.S.?” suggests that a privatized
retirement program for unsophisticated investors could be a serious
mistake:
Britain’s
pension industry is reeling from the financial fallout of a decade-old,
government-backed program that led millions of Britons to opt out of their
public and company-sponsored pension plans and invest the money
themselves….
Dubbed the “pension
misselling” scandal, it is expected to cost British insurers an estimated
$18 billion in compensation payments to nurses, miners, schoolteachers and
other workers who were hurt by bad
advice.38
One
has to wonder: Why hasn’t the U.K.’s experience been more widely
publicized in the U.S.?
§
Undoubtedly,
some persons in the U.K. invested their pension money wisely and ended up
better off. A privatization
of such a program gives significant advantages to those who are
sophisticated and well-connected. But what happens to those for whom it
was a disaster?
§
The
Social Security system isn’t supposed to be a test of one’s investment
skills. It is supposed to provide a minimum guaranteed retirement fund for
every worker—regardless of his or her personal financial sophistication.
§
If
Social Security is privatized, what will we do for those people who worked
hard all their lives and who are “hurt by bad advice,” even advice from
reputable investment firms? And that doesn’t even take into account the
effects of the deplorable moral standards—deception, fraud, etc.—of so
many of today’s investment professionals.
Those
who think that retiring workers need to be responsible for their own
investments and for protecting themselves from bad advice miss the whole
purpose of the Social Security system. Of course, those who want to
privatize Social Security aren’t interested in the welfare of workers to
begin with.
This
whole privatization move is just another way to allow America’s most
powerful corporations to take control of, and profit from, every aspect of
American life.
Aside
America’s
most prestigious investment firms are represented in the excerpts
presented in this chapter, and these excerpts represent a small fraction
of what has been reported in recent years. In many cases, the examples of
deceit, irresponsibility and fraud are specific to individual firms, but
in many others they represent industry-wide
practices.
This
is the industry that Republicans and conservative Democrats want to
control the retirement funds of persons who have little or no
sophistication in investments or money markets.
Of
course, the control that the investment and securities industries already
have over American lives is only a part of the problem. Now it’s time to
consider the extent to which conservatives have allowed investors and the
corporate world to wrest control—from our democratically elected
government—over other aspects of our lives.