As of 2013 the Census Bureau counts 13.7% of Nevada’s population as aged 65 or over. The handy Plastic Brain tells us that amounts to 382,435 people. Unfortunately, there’s a chunk of the 2,839,099 (2014) people in Nevada who have some silly and alarmingly self-serving ideas about how retirees should plan for those Sunset Years; and, more egregious ideas yet about how those under 65 should be planning for their retirement. These would be the people in the “privatizer and opportunist” category. Let’s take a look at both. First, a quick review of the privatizers and Social Security (and by extension any public retirement program), and then a gander at the opportunists as exemplified by the unfortunate choice of champions brought to us by Senate Republicans.
The Great Scam
FALSE: “Social Security is Going Broke!” Underpinning the Great GOP Retirement Scam shuffle is the notion that somehow Social Security “isn’t going to be there for young people…” and therefore younger Americans should pile their retirement funds into private sector wealth management schemes. “But, but, but,” blubber the privatizers, “the Trustees Report and the CBO agree it will be b’b’b’..bankrupt by 2042 or 2052.” [CNN] No they didn’t.
They reported that in order to provide promised benefits for elderly people the Social Security Administration will have to tap into the reserve fund – it is not – repeat not – going bankrupt. Nor, will those receiving benefits from the reserve funds live forever, thus at some point the system will stabilize. Tapping into the reserve fund – which was put in place to deal with the Baby Boomers – is not the same as “going bankrupt!” There are some basic facts (of life) to deal with at this point. The Census Bureau report, An Aging Nation, (2014) explains carefully:
“In 2050, every age group is projected to be larger than it was in 2012. This is not the case between 2012 and 2030 or between 2030 and 2050. For instance, the number of men aged 48 to 58 and the number of women aged 47 to 58 in 2030 are projected to be smaller than those in the same age groups in 2012 (see Figure 2). This is because large cohorts of baby boomers were in these age groups in 2012, and smaller and younger cohorts will have replaced them by 2030. Similarly, the number of women aged 66 to 77 is projected to peak in 2030 and be smaller in 2050 than it was in 2030, as the smaller birth cohorts born in the late 1970s moves into these age groups.” [Census pdf]
A “smaller” cohort means that once the baby boomers die off, and they will do that because they are human beings, there will be less demand on the system for benefit payments. That’s what the entire idea of the Trust Fund was based on, the knowledge that the system needed a “savings account” to get past the baby boomer generation. “But, but, but..” sputter the privatizers, “there won’t be enough young people paying into they system..” Nonsense. Take a look at this chart from the report on aging: (figure 2)
Seriously, does anyone really think there are going to be more elderly retired people than younger workers in the foreseeable future? If someone believes that then I guess I would try to sell them some scammy retirement savings plan! I could also try to sell them an automatic kitchen gadget that “Cools your water in an instant! No Ice Cubes Required!”
FALSE: “Social Security won’t guarantee your retirement…” this is right so far because Social Security was never meant to be an entire retirement program – it was meant to keep elderly people out of abject poverty. However, the rest of the privatizers’ pitch gets more dicey, “therefore we should privatize the system and let people have a Choice…” There’s a reason Social Security is called a Social Safety Net. It’s the safety net in case all else fails and an elderly person has little else to fall back on. That we have a Social Security system to keep people from falling into an abyss of poverty doesn’t mean that people can’t choose to augment their retirement plans with pension plans, savings accounts, equity accounts, and all manner of other savings vehicles. The privatizers would like for us to forget that we already have (and have had for decades) alternative savings plans for retirement! The privatizers would be perfectly pleased to get all the money that’s paid into Social Security funneled into the hands of Wall Street traders… now there’s a thought that should lower one’s body temperature, or raise the blood pressure?
And now we get to the good part wherein the privatizers and scammers walk the halls of Congress to promote those alternative and supplemental retirement savings financial products.
The Smaller but Painful Scams
“Sen. Elizabeth Warren (D-Mass.) on Tuesday embarrassed Primerica President Peter Schneider, who Senate Republicans had invited to testify against a new regulation designed to protect retirement savings from dodgy investment managers. The Obama administration estimates that Americans lose $17 billion a year from investment professionals who manage retirement accounts by prioritizing their own financial interests over those of their clients. It has proposed a simple solution: making that illegal.” [HuffPo]
Hmm, the Senate Republicans INVITED Primerica’s testimony against a fudiciary responsibility standard? And, what was Primerica testifying against?
“In February, the President directed the Department of Labor to move forward with a proposed rulemaking to require retirement advisers to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits. And today, the Department of Labor is taking the next step toward making that a reality, by issuing a Notice of Proposed Rulemaking (NPRM) to require that best interest standard across a broader range of retirement advice to protect more investors.” [DoL] (emphasis added)
Thus, we could assume that the Senate Republicans are in favor of allowing retirement advisers to put their own profits AHEAD of consideration for their client’s best interests? Okay, so what can happen when an investment adviser steers a client into territory which is not in the best interest of the client but really bolsters the firm’s bottom line?
“A system where firms can benefit from backdoor payments and hidden fees often buried in fine print if they talk responsible Americans into buying bad retirement investments—with high costs and low returns—instead of recommending quality investments isn’t fair. A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total. To demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.” [DoL]
Actually there was more bad news from the Council of Economic Advisers in its report on the Effects of Conflicted Investment Advice on Retirement Savings (2015 pdf). There’s this conclusion: “A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.” And, if this weren’t bad enough, there’s another item: “The average IRA rollover for individuals 55 to 64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 was lost in the transfer.”
Thus, in general terms, retirees are losing an aggregate of some $17 billion from conflicted financial advice, losing a potential of five years worth of retirement savings value, and dropping 12% “in transfer” because of conflicted advice in the process.
And, to dispute this the Senate Republicans hauled in the CEO of Primerica? Oh, what a tangled web we weave when first we practice to deceive?
Let’s begin our Primerica Story in Florida in 2002 with a classic case of privatization:
“Primerica’s legal battles stem from a change to Florida’s retirement system in 2002. It gave employees the option to switch from a traditional pension plan, in which they would receive lifetime benefits based on their salaries and years of service, or convert the value of their pension to a lump sum payment which they could invest in mutual funds and other securities offered through the state retirement system.”
Primerica told potential investors that they could put their pension money into an account which could (note Could) earn more than their pension benefits, and could be inherited by family members unlike standard pension benefits. What Primerica sort of forgot to tell the state employee investors was that the market could also go down. South. Pear-shaped. In the commode… And thus it did in 2007-2008. By July 2013 Primerica was fighting off lawsuits in Florida and allocating $3.9 million to defend its claims in court cases and arbitrations. [Reuters] As of January 2014 the amount set aside to settle various and sundry complaints against the company climbed to $9.3 million. [BfH] The 2015 figure for fighting off the litigation was up to $15.4 million. [HuffPo] And THIS was the company Senate Republicans thought would be a good source of testimony against the fiduciary responsibility rule?
So, what did the Senate Republicans get for their efforts to include Primerica’s CEO Peter Schneider on the witness list?
The Big Bambooza-a-lah began with Schneider’s written testimony:
“We are believers in educating the households we serve about fundamental financial concepts. Our investment education and philosophy is geared toward the needs of middle‐income households, who often are new or less experienced investors. In that regard, we produce easy to understand educational pieces teaching fundamental investing concepts including the critical importance of taking the steps needed to start along the path of financial security.”
Uh, if your investment education process is “easy to understand” then why the escalating amount of funds the company is plowing into defending the itself in some 238 cases? When your defense fund increases by 295% in two years it’s pretty clear someone didn’t have a solid grip on “investment education” or “the fundamental investment concepts.”
Having wailed on about how Primerica was serving the Middle Class, a reference tossed in at just about every possible location in the testimony, Schneider got down to his real complaint “Guv’mint Regulations,” and the favored GOP buzzword, “burdensome.”
Those wonderful, admirable, Middle Class customers would be cheated of their opportunity to invest with Primerica because the rules for investment advice would be too “burdensome.” Here comes the “Daze and Dizzy:”
“We draw this conclusion first and foremost because the Department’s expanded definition of fiduciary turns into a fiduciary act almost every conversation about an IRA that a financial professional might have. ERISA and the Internal Revenue Code prohibit fiduciaries from receiving commissions and other traditional forms of variable compensation in connection with a covered benefit plan such as an IRA unless what is known as a “prohibited transaction exemption” applies and provides relief. Effectively, the DOL’s expanded definition of fiduciary makes an exemption from the prohibited transactions rules necessary to continue to effectively serve individuals investing in IRAs. Unfortunately, the exemption the Department has proposed to preserve the commission‐based services for IRAs – the Best Interest Contract Exemption (BIC) – is not operational.”
Translation: A conversation including investment advice for an IRA would be covered unless there is an exemption, and the “best interest contract is not operational.” We can take it that “not operational” means it won’t work.
This is followed by more “Daze and Dizzy” as Schneider attempts to explain, and at this point we need to parse the testimony carefully:
Instead, our primary concern is that the requirements and uncertainties of the BIC exemption are so complex and burdensome that the exemption is neither administratively nor operationally feasible. (1) The trouble is that, from start to finish, the BIC exemption fails to offer certainty. In operating our business, “certainty” with respect to regulatory compliance matters is critical because a failure to satisfy the proposed exemption may result in steep prohibited transaction penalties, including the forfeiture of compensation and excise taxes, as well as consumer lawsuits for breaches of contract, and potentially even class action lawsuits. (2) Critically, the technical implementation of the exemption promises to be a substantial burden, and to cause a significant disruption of services to our clients, with no true added benefits in the way of investor protections. (3)
(1) “Complex and burdensome,” could any phrase be more illustrative of any and all Republican complaints about consumer protection rules, product safety regulations, clean air and water standards? This is standard GOP rhetoric, and no more probative because it is repetitive. Nor does this explain WHY the rule, and the exemption, would be a burden to a company intent on supervising its employees and representatives in such a way as to insure they properly represent the risks and rewards of their products.
(2) “Creates uncertainty,” and again we have good old reliable Republican boiler-plate. The well worn phrase has been applied often to banking regulations (somehow the banks are still with us and doing quite well.) Once more the testimony doesn’t explain WHY anyone should be uncertain – IF the firm were providing the best financial advice it could in the most educational way possible. If, however, the company was prone to, say, wrap backdoor payments and hidden fees in the fine print then they might be “uncertain” about how much they could get away with. The fact sheet from the Department of Labor is really clear, for a technical document, about what constitutes investment advice.
(3) More boiler-plate. Now the implementation is a “substantial burden.” Not just any old regular garden variety burden, it’s substantial! It’s interesting how many investment advisors there are in this country who don’t seem to have any trouble offering investment advice without selling products with hidden fees and backdoor payments. In this instance old fashioned capitalism works, the firms sell products that people understand, and know both the rewards and the risks involved, then people recommend these firms to their friends and relatives – and so it goes. If providing clear and honest investment advice without playing backdoor payment and hidden fee games is a “substantial burden,” then perhaps the business isn’t worthy of its clientele?
Then comes the “threat.” Consumers will lose their “freedom” to choose their investment advisers:
“This shift to advisory services is likely to cause millions of small balance IRA owners to lose access to the financial professional of their choice, or any at all. Those with enough investments to meet the account minimums will face higher costs and experience losses in retirement savings. These resulting losses by some estimates could be as high as $68‐$80 billion each year.”
Please. Let’s look at this from the consumer’s perspective – no one chooses to be ripped off. And, if one’s investment advisor is playing games for the firm’s bottom line at the expense of the retiree’s retirement savings then that future retiree should not be prey for the predators. Is Mr. Schneider serious that NO brokerage firm will consider a small IRA or other investment? That our little Middle Class man or women will be left shivering in the cold, facing the closed door of Merry, Berry, & Itch LLC, with $1,000 in hand? Trust me, that money will go somewhere, and if it doesn’t meet Merry, Berry, & Itch’s minimum it will certainly find its way into a money market account at the local bank. If, the amounts do meet the minimum, would there be “higher costs?” Maybe, but they wouldn’t be hidden. Do private retirement accounts invested in equities lose money? Yes, again, but why shouldn’t the customer, the consumer, be made aware of this very fundamental fact? However, we should observe in Mr. Schneider’s testimony that he presents no substantiation for his assertion that the costs will be higher and the losses any greater, other than his un-sourced “some estimates” phrase.
Senator Warren was correct to make an example of Mr. Schneider and his business model. It should be noted that (1) the privatizers with their claims of insolvency for both Social Security and state retirement programs are doing a national disservice with false claims intended to frighten people into putting both the social safety net and public pension programs into the hands of the players in the Wall Street Casino; (2) private firms which utilize questionable business practices which involve lots of fine print hiding fees and management charges and which engage in back-door payoffs are not functioning in the customer’s best interests; and (3) trying to pass off clichéd, stale, and trite boilerplate as Congressional Testimony is unhelpful in the legislative process.