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Abstract
Asset managers – financial institutions like BlackRock, State Street, and Vanguard – manage trillions of dollars of US household financial assets, including public pension funds at the federal, state, and municipal level. The structural power of asset managers means they play a decisive role in corporate decision-making, while the conflicts of interest inherent in their business model and a short-term interpretation of their fiduciary duties means they do not serve the actual interests of their economic beneficiaries in a sustainable economy. I propose establishing a public asset manager in the United States to serve as the asset manager for public pension funds. This article situates this proposed institutional reform in the broader evolution of asset manager capitalism and explains how establishing a public asset manager is an institutional reform that would shift the financial system toward serving the actual interests of the people and social systems on which it depends.
Acknowledgements
The author gratefully acknowledges excellent research assistance by Chirag Lala.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 This is distinct from how broker-dealers are treated: in the Dodd-Frank Act, Congress prohibited broker-dealers from voting in corporate director elections without instructions from the beneficial owner of the shares.
2 So much so that it was the substance of President Biden’s first presidential veto, as he vetoed the Congressional measure that would have overturned the Department of Labor’s rule that would make it permissible for fund managers to consider ESG: https://www.reuters.com/business/sustainable-business/biden-vetoes-resolution-block-labor-dept-rule-esg-investing-2023-03-20/
3 Sweezy claimed that "the investment banker ruled up until the crash, but then he suffered a "dramatic eclipse, [and that] such power as he still retains is largely rooted in a past that is gone forever," (Sweezy, Citation1941, p. 380). The key drivers that Sweezy points to were the separation of commercial and investment banking in 1934 and institutions like the Reconstruction Finance Corporation that were set up during the New Deal to perform the financial functions that formerly required private financial institutions.
4 By 1968, the Patman Report noted (in an echo of the Pujo Committee) that: ‘the major banking institutions in this country are emerging as the single most important force in the economy.’ Similarly, the SEC Institutional Investor Study Report claimed that: ‘large institutions, particularly banks, have the potential economic power to exert significant influence over many companies whose securities comprise their portfolios, particularly large companies.. [yet they] tend to be reluctant to exercise their power, particularly in an open and public way,’ (Kotz, Citation1980).
5 ERISA stands for the Employee Retirement Income Security Act of 1974. For more information, see the Department of Labor, ERISA: https://www.dol.gov/general/topic/retirement/erisa.
6 Retirement insecurity is pervasive and growing: millions of Americans work for decades but are unable to accumulate wealth for retirement: for the bottom half of US households by wealth, median retirement savings are zero (Ghilarducci & Hassett, Citation2021).
7 Bureau of Labor Statistics Employee Benefits in the United States, Table 1. https://www.bls.gov/news.release/ebs2.t01.htm
8 US Census Bureau Annual Survey of Public Pensions: https://www.census.gov/data/tables/2021/econ/aspp/aspp-historical-tables.html.
9 The ‘actuarial funded ratio’ calculated from state and local pension financial reports averaged 75.5% in 2021, meaning that roughly a quarter of plans in aggregate were unfunded#. However, the accounting rules that govern such funds are, according to Sgouros (Citation2017), ‘designed to insure against risks that public pension funds do not face, while simultaneously failing to insure against the risks that they do face,’ (Sgouros Citation2017 p. 4).
10 The Federal Employees’ Retirement System (FERS) includes a basic annuity and Social Security as well as the TSP, which is a defined-contribution plan. See ‘How the TSP fits into your retirement’ for further detail: https://www.tsp.gov/tsp-basics/how-tsp-fits/.
11 To further add to the picture of the growth of the asset manager industry, it is important to note where most of these holdings are located geographically. Most asset manager holdings are concentrated within North America, and this has remained the same over the past decade. In 2007, North America had the greatest portion of holdings, at $24 trillion. As of 2018, North America continues to hold the most, with $35.2 trillion. North America has also seen the largest increase in asset manager holdings in the past decade, though other regions have seen an increase as well. Between 2007 and 2018, Europe went from $13.7 to $20.5 trillion, Japan and Australia together from $4.3 to $6 trillion, Asia from $2.3 to $7.2 trillion, and the Middle East and Africa from $0.9 to $1.3 trillion.
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Notes on contributors
Lenore M. Palladino
Lenore Palladino is Assistant Professor Economics and Public Policy at the University of Massachusetts Amherst.