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Home Publications Blogs Beat the Press Third Way Proposes to Tax Workers to Subsidize Wall Street

Third Way Proposes to Tax Workers to Subsidize Wall Street

Tuesday, 08 April 2014 05:50

For those who have been worried about the plight of the poor boys and girls who work in the financial sector, Jonathan Cowan and Jim Kessler, respectively the president and vice-president of Third Way, have a plan to help. In a NYT column yesterday, headlined "Capitalize Workers!," Cowan and Kessler proposed a supplemental retirement system which would require employers to put 50 cents an hour into a retirement fund for all of their workers. Cowan and Kessler tell us that this should lead to an accumulation of $160,000 for a worker who works full-time from ages 22 to 67, leading to an annuity of $790 a month. What's not to like?

First, we should give Cowan and Kessler credit for effective recycling. Mandated savings plans like this are not exactly new, so getting this plan published in the NYT as a remarkable new idea to address inequality is a pretty good feat.

Getting to the substance, the requirement that employers pay 50 cents an hour for their workers' retirement is a nice little trick for the kiddies, but all the adults in the room know that this money will come out of workers' wages.(The assumption that employer side payments on wages are in the long-run deducted from wages is almost universally accepted among economists.) This deduction would actually be a substantial hit to low wage workers. Cowan and Kessler's proposal would effectively amount to a 5 percent tax on the wages of someone earning $10 an hour. That is not exactly trivial -- the Social Security trustees project that we could fully fund the program for the next 75 years with a tax increase that is a bit more than half this size. 

The next issue is the $160k accumulation that Cowan and Kessler project. They qualify this comment by saying:

"if stocks and bonds enjoy the same average rates of return as they did over the last 45 years."

That is a huge "if." Given current price to earnings ratios in the stock market and growth projections for the economy, it is almost inconceivable that stocks and bonds will enjoy the same average returns in the future as they did over the last 45 years. With the ratio of stock prices to trend earnings now approaching 20 to 1, we should anticipate real returns in the stock market going forward to average roughly 5 percent. If we assume real returns on bonds of 3.0 percent (this is probably a bit high), then a portfolio that is invested half in stock and half in bonds should produce a real return on 4.0 percent, before deducting fees.


Fees are a very big issue. These are income to the financial industry and a direct cost to workers. Fees on retirement accounts often exceed 1.0 percent of the funds invested. If that proves to be the case with these accounts (and fees average 1.0 percent), then the after fee return will average less than 3.0 percent annually. In this case, a worker can expect an accumulation of $92,700 by age 67. If we assume that the industry exhibits some restraint and keeps their fees to just 0.5 percent, then the accumulation will be $105,800 at age 67. Since most of these accounts are likely to be relatively small, the average fees will likely be high since the overhead costs will have to be spread over a smaller amount of money.

It is worth noting that fees can be substantially reduced if this money was administered through a public system like the Thrift Savings Plan (TSP) that is available to federal employees. Fees for this plan are less than 0.2 percent of the value of the fund. Cowan and Kessler could have suggested going this route, but that would actually hurt Wall Street, since making such accounts available would likely pull money away from the financial industry as people take divert money from high cost private 401(k)s.

There is real money at stake here. After twenty years these accounts will have accumulated close to $5 trillion (in 2014 dollars). If the financial industry is siphoning off 0.5 percent of this every year in fees, that amounts to $25 billion a year in revenue. If its fees average 1.0 percent it would translate into $50 billion a year in revenue. 

That sounds like a pretty good deal for the financial industry, but as they say on the late night TV commercials: but wait, there's more. The financial industry charges people to convert their money into annuities. The costs range between 10-20 percent. If assume that 2.5 million workers a year annuitize accounts that average $100,000 a piece, then the fees from annuitization will amount to between $25 billion and $50 billion a year when the system has fully matured. Again, the fees could be largely avoided with a publicly run TSP-type system, but that doesn't appear to be Cowan and Kessler's agenda.

If we assume that annuities will cost 10 percent of the accumulation, then a worker in the Cowan-Kessler system can expect a $500 monthly payment after 45 years of full-time full year work. (Most workers do not work full-time, full-year for anywhere close to this number of years.) If a worker has bad luck and pays 1.0 percent in annual fees and 20 percent for an annuity then their monthly payment would be closer to $400 a year. This is better than nothing, but perhaps not the best use of their money.

Comments (15)Add Comment
Biiig IF
written by Chris E, April 08, 2014 7:01
If we assume real returns on bonds of 3.0 percent (this is probably a bit high)

with negative TIPS, this is such a big IF.

also, some great points and analysis by Dean as usual, but the bigger point i think is that...we already have a public retirement program. if the point is to increase the cushion workers have, why not increase SS payments? scrap the cap and maybe up the employer contribution to SS and then you have the same effect without gambling on private markets.
Agree with siphoning 1/2% off per year from retirement accounts is horrible.
written by Steve Ellerson, April 08, 2014 7:10
I agree with siphoning 1/2% off per year from retirement accounts is horrible as mentioned in the article & how much money that equates to at retirement time.

That is why anyone must also disagree with your 1/2% transaction tax on middle class retirement accounts as well.

IRA accounts have nothing to do with HFT or anything else.

Why propose a 1/4% transaction tax on buys and another 1/4% transaction tax on sells in IRA & Roth IRA accounts as well as regular accounts? That equates to the same 1/2% as you mention in the article.

Why propose IRA accounts pay ANY transaction tax? Why not exclude them?
News should expose, not sell, Cowan-Kessler 'Capitalize Workers'
written by jaaaaayceeeee, April 08, 2014 8:02

Quite a few of the online-only comments on Cowan-Kessler's 'Capitalize Workers' proposal to 'cannibalize workers' for Wall Street's benefit, asked why not instead improve Social Security.

Yet it is Dean Baker, instead of our national news media, is doing real news reporting. And not just on how many different ways this policy would be a worse deal than Social Security (and how we could increase Social Security benefits for half the price).
written by skeptonomist, April 08, 2014 8:10
Speaking of more Wall-Street welfare, how about Obama's myRA? Evidently investment managers weren't getting their hands on enough of workers' money, so now workers can sign up for a program that will convert their savings to investment accounts when they reach $15k.

For several reasons the way to handle retirement is not to process money through Wall Street - corporations don't need the money, they have too much capital as it is. Social Security should be expanded, drawing more income from raising the cap (which Obama once supposedly favored) and/or taxing non-wage income. Third-way aside, most Democratic politicians wouldn't dare to do something that isn't in the interests of Wall Street (Elizabeth Warren and a few other excepted)
written by Kat, April 08, 2014 9:00
If you like that article, you will just love this one. Someone read Capital in the... and came up with an, er, unique conclusion.
There's always a new way to flog this discredited idea.
Too Much Trouble
written by Larry Signor, April 08, 2014 9:17
Dean went to far too much trouble to debunk this piece of s**t article. We have a (fee free) national savings plan...it is called Social Security. Let's just improve it, not re-invent the wheel.
dangers of deflation
written by Peter K., April 08, 2014 9:58
Mr. Baker care to comment?


written by Alex Bollinger, April 08, 2014 11:23
Wait, an org whose board is dominated by financiers wants to tax people to hand money over to Wall Street?

And here I thought that the only reason that the world works is because people's actions are motivated by self-interest, except for their participation in politics which is motivated entirely by a dispassionate analysis of competing political philosophies. Huh.
written by Kat, April 08, 2014 12:04
Dean went to far too much trouble to debunk this piece of s**t article.
You might think it is far too much trouble, but here we are. There are two articles today in the leading dailies touting the benefits of private savings accounts over SS. The WSJ would have you believe that owning a few shares in a company practically makes you a chief executive or at least gives you a seat with the board of directors. This after we have seen two asset bubbles burst in our lifetime.
written by PeonInChief, April 08, 2014 12:16
This is a lousy deal for workers. When my husband retired, we had two pensions, one of which is known around our house as the "little pension." My husband only worked for the major financial institution for five years, and was a low-level worker. But that pension pays more than this one would. I suspect that had we faced the fees that Wall Street charges now, we might call it the "very little pension."
written by David M, April 08, 2014 1:12
@Kat, If the hoi poloi did own a few shares via retirement accounts and tried to exercise their shareholder rights, you know WSJ would be the first one decrying the abuses of activist investors.
written by Larry Signor, April 08, 2014 2:08
@Kat...we are on the same page about SS. I just find it hard to believe we are still talking about such an atrocious usury as forced private savings plans as opposed to SS. There are so many reasons to think private plans would not work and merely be wealth extractors to benefit the 1%. Income security and health-care should be the top priorities of a 21st century government.
CEO Bonuses Don't Count as Pay Either
written by Last Mover, April 08, 2014 3:17

Of course this is just another big commie lie from a lefty loser liberal blogger who doesn't understand how job markets work in the real world. Dean Baker wants to penalize honest attempts by concerned job makers to create more savings for their employees with such short planning horizons obviously unsustainable.

Proof: When CEOs have benefits that include bonuses for specific outcomes, oh, say something like the CEO of Time Warner getting $80M if the merger with Comcast goes through, of course that has no effect on what CEOs get otherwise absent mergers and other incentives does it.

Like you know, those CEOs really save a lot from those bonuses don't they, just in case they don't get a golden parachute on top of them as well to burnish up that nest egg should they live to be a thousand years old.

Poor babies. Otherwise they would be forced to live on average CEO pay with nothing extra left to save, and live from hand to mouth like their employees, forced to depend on SS for retirement.
written by Ronald Pires, April 08, 2014 5:51
Isn't this the same crap that Obama offered in the SOTU? Didn't that proposal REQUIRE that his Wall Street buddies would be the manager of these funds?
1/2% twice is less than 1/2% per year... and its taxes
written by Jeff Fisher, April 09, 2014 9:29
0.5% is the lowest 401k mutual fund cost I have experienced and there has only ever been one option that low. If the company chooses the options they choose the options the financial firms pay them to choose. 1% is a far more realistic estimate of what the retirement services industry would charge most people each year, if employers are a middleman.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.