Would economically targeted investments trigger a pension crisis?

0 Comments | Insight on the News, Sept 16, 1996 | by James Saxton, | Michael Calabrese

As Congress struggles to downsize government, President Clinton is working behind the scenes to use private pensions to expand government's reach and extend his liberal social agenda. Although he has promised that the era of big government is over, the president quietly continues to shape policy through administrative edict and regulatory decrees. In no other area is he having a greater impact than with policy governing Americans' private-pension funds.

With more than $4.9 trillion in pension funds and $3.5 trillion in private pensions alone, the Clinton administration's social planners cannot resist this tremendous pool of wealth. If they could exert control over just 5 to 10 percent of private pensions, that would give the administration $175 billion to 300 billion in pension funds with which to finance their social agenda.

In the investment world, the practice of using pension funds for political purposes long has been known as "social investing." Unfortunately for retirees, when public employees' pension funds have attempted social investing, it often has led to financial disaster. To escape the opprobrium associated with social investing, the linguistically conscious Clinton administration calls these social projects economically targeted investments, or ETIs. I prefer to call them PTIs, or politically targeted investments, because they are politically, not economically, motivated.

Before Republicans in Congress called attention to the dangers of ETIs, the administration was quite open about its plans to utilize working Americans' private-pension money to achieve a variety of social goals. ETIs were a prominent part of Clinton's 1992 campaign document, "Putting People First: A National Economic Strategy," which called for an $80 billion investment in infrastructure construction but which also could be used to finance a variety of political projects such as low-income housing or union-job creation. The idea was to draw part of the funding from public and private pensions. In essence, the millions of working Americans who set aside a portion of their income to ensure a safer retirement unwittingly would finance whatever social goal the Clinton administration chose to promote.

Following the strategy laid out in Putting People First," the administration met with leaders of the pension community confidently expecting their help to implement the pension grab. Instead, they hit a wall of resistance because this type of social investing has proved to be an economic failure and would violate the federal laws governing private-pension funds.

To overcome these difficulties - while carefully avoiding the need to seek congressional approval - Labor Secretary Robert Reich issued an "Interpretive Bulletin" in June 1994, which defined ETIs in a way designed to make them seem consistent with the Employee Retirement Income Security Act, or ERISA, the federal law that protects private-pension funds from mismanagement.

Step two of Clinton's pension-fund grab was to establish in September 1994 a clearinghouse intended to "showcase" ETIs and give them the federal government's "good-housekeeping seal of approval." The Labor Department, without informing Congress or obtaining congressional authorization, is spending $1.2 million of taxpayers' money to get the clearinghouse up and running. Some questions naturally arise: Should a government-sponsored organization decide how Americans' pension funds will be invested and what criteria will be used to decide what is an ETI? To date, the Clinton administration refuses to answer these questions.

The final step of the great pension-fund grab will be a mandatory ETI quota of 5 to 10 percent of the total private-pension fund assets. A 5 to 10 percent quota is what Clinton imposed on Arkansas' public-retirement system in 1985 while he was governor. What would that mean if enforced at the national level? In 1994, total private-pension-fund assets in the United States amounted to $3.5 trillion. A 5 percent ETI quota would mean that the Clinton administration suddenly would have at its command a whopping $175 billion with which to enact its liberal social agenda. More insidiously still, a quota of this magnitude would mean that politicians had succeeded in conscripting private-pension federal government.

Targeting the investments of pension funds into the compulsory economic service of the ETIs are nothing more than a carefully defined subclass of social investments. They pose a clear and present threat to the economic health of America's pension system. The relevant economic research indicates that pension funds that target social investments produce yields well below market averages.

For instance, a 1983 study by economist Alicia Munnell, a member of the president's Council of Economic Advisors, found that public pension funds that targeted social investments had assets that were significantly riskier and less liquid, and decreased the yield by an average of 2 percentage points, or 200 basis points. A number of studies conducted by public-finance experts Wayne Marr of Clemson University and Jon Nofsinger of Washington State University indicate that ETIs lower returns by 118 to 210 basis points. Finally, a 1994 University of Pennsylvania study by Olivia Mitchell, a professor of public finance, determined that public-pension-fund ETIs generated lower returns when they focused on social goals.