Defined Contribution Plans and U.S. Political Economy
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Paul has a theory that:
it was a huge boon to the plutocracy to convert essentially all non-government and quite a few government pension plans from a defined benefit to a defined contribution model. The obvious advantage of this from the perspective of the Lords of Capital is that it left their employees completely at the whim of the financial markets in terms of funding their retirements. The less obvious benefit is that it converted tens of millions of people into mini (very very mini) Warren Buffets, who were thereby incentivized to identify with the rentier class rather than with people who work — I mean real work not fake work — for a living.
I agree with Paul, but I also think that this is only one of the mechanisms through which the shift to defined contributions skewed U.S. political economy.
During the 2008-2009 financial crisis, Jon Stewart ripped into Jim Cramer [ed: see comments] in an interview that, to use an anachronistic phrase, “went viral.” At one point, Stewart told Cramer that:
These guys at these companies were on a Sherman’s march through their own companies, financed by our 401(k)s — and all the incentives of their companies were for short-term profits and they burned the house down with our money and walked away rich as hell.
My guess is that the defined contributions had a number of pernicious consequences. As Thomas Palley argues:
First, [defined contribution plans] generate large fee income through charges for custodial services and brokerage commissions. Second, they increase individual investor demand for equities, which boosts equity prices. Third, they create an investor identity among households that then generates favorable political support for policies favored by large financial interests.
The rise of defined-contribution plans are both a symptom and a cause of the “financialization” of the U.S. political economy. We need to understand that—regardless of whether we’re about to see our retirement funds implode—taxpayer subsidies for defined-contribution plans function as rents paid to the financial sector.
For a fascinating discussion of “asset manager capitalism” and inequality, check out a 2019 talk by Mark Blyth.
