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Fueling Financialization: The Economic Consequences of Funded Pensions:

Fueling Financialization: The Economic Consequences of Funded Pensions: Figure 1. Composition of U.S. Pension Fund Assets, 1945-2020. Marginal categories excluded for readability are money market fund shares, deposits and currency, and loans. The main component of “Total miscellaneous assets” are claims on the pension plan sponsor. The data include private pension funds, state and local government employee retirement funds, and federal government retirement funds. IRA assets are not included. 1062218 NLFXXX10.1177/10957960211062218New Labor ForumBraun research-article2021 New Labor Forum 2022, Vol. 31(1) 70 –79 Fueling Financialization: Copyright © 2021, The Murphy Institute, The Economic Consequences CUNY School of Labor and Urban Studies Article reuse guidelines: https://doi.org/10.1177/10957960211062218 of Funded Pensions sagepub.com/journals-permissions DOI: 10.1177/10957960211062218 journals.sagepub.com/home/nlf Benjamin Braun Keywords pension funds, financialization, asset manager capitalism, capital stewardship, labor’s capital The financial sector, whether measured by its same time, ever since Peter Drucker’s warning total assets or its value-added share of gross of the coming of “pension fund socialism” was domestic product (GDP), has never been a more countered by Jeremy Rifkin and Randy Barber’s formidable force in the U.S. economy. The positive vision of labor’s capital as an instru- upswing in financialization since the 1970s has ment of labor power, the latter has gripped the coincided with the steady accumulation of long- imagination of scholars and labor organizers. term retirement savings and their consolidation Indeed, the past two decades have seen an in institutional capital pools. Pension fund impressive increase in pro-worker activism by demand for high-yield, long-term financial public-sector and multi-employer, collectively claims has acted as a catalyst for financializa- bargained plans known as Taft-Hartley pension tion, understood as the reorganization of owner- funds, and a lively debate is taking place about ship relations and economic activity in ways the prospects for “capital stewardship” to deliver that serve the needs of institutional capital pools. results for U.S. workers. In this context, I argue In the driver’s seat of this reorganization sits a that the ongoing debate about meso-level pros- financial sector whose primary function has pects for labor’s capital under-appreciates the shifted from financing investment to preserving macro-level consequences of U.S. funded pen- wealth, along with a shift in institutional form sions as the world’s single most consequential from banks to asset managers. Under this “asset financializing force over the past half-century. manager capitalism,” the dominant figures on Wall Street are no longer the CEOs of the big Standing at $35 trillion in 2021. . . banks but figures such as Larry Fink or Stephen U.S. pension assets account for 62 Schwarzman, the CEOs of BlackRock and percent of global pension assets. Blackstone, respectively. Asset managers’ This money has fueled the growth power is most visible vis-à-vis listed corpora- of the asset management sector . . . tions—that is, in corporate governance—but it reaches much further. Closely held companies, My intention is not to blame global finan- residential real estate, infrastructure, land— cialization on U.S. labor. The rise of funded there is no sector that asset managers have not pensions is a multi-causal, global phenome- made accessible for financial capital and where non. Rather, my purpose is to place funded they do not exercise substantial structural power, pension systems and their institutional capital often through outright control. pools where they belong—at the center of the For labor, the consequences of financializa- history of financialization and asset manager tion and the rise of asset manager capitalism have been dire. Countless empirical studies have documented correlations between various Max Planck Institute for the Study of Societies, Cologne, Germany measures of financialization, such as payouts to shareholders, and various measures of income Corresponding Author: and wealth inequality, such as wages. At the Benjamin Braun, bb@mpifg.de 72 New Labor Forum 31(1) Figure 2. Retirement assets and their importance for the mutual fund sector. Source. Investment Company Institute, U.S. Retirement Market, second quarter 2021. Note. Roughly, one-third of total retirement assets are invested in mutual fund shares. Panel C shows that that third accounts for more than 50 percent of the mutual fund sector’s assets under management. DC = defined contribution; DB = defined benefit. capitalism. Standing at $35 trillion in 2021 (see Financialization Figure 2, panel A), U.S. pension assets account Financialization in the United States has been for 62 percent of global pension assets. For explained as the result of the exhaustion of the almost half a century, this money has fueled the Fordist growth model. Competition in interna- growth of the asset management sector, which tional trade, de-industrialization, and disinfla- in many countries has actively lobbied for pen- tionary policies all put pressure on political sion privatization. When pension fund activ- actors to liberalize finance so that newly cre- ism brought corporate governance reform, ated credit could substitute for stagnating wage corporations’ quest for shareholder value income and sustain aggregated demand. brought workplace fissuring and wage stagna- However, as historians Fernand Braudel and tion. When pension funds pushed into real Giovanni Arrighi have argued, financialization estate assets for better returns, private equity has been a recurring feature of capitalist devel- firms delivered by raising rents and evicting opment. It tends to be driven by a slowdown of those that could not pay. accumulation that makes reinvesting profits in The argument is thus directed not against immobile productive capital relatively less specific pension fund investment practices but attractive to capitalists, who instead seek against funded pensions tout court. The alterna- returns from liquid financial claims. tive is a pay-as-you-go (PAYGO) system that Taking as given a certain level of national redistributes money from the young to the old, income, there are three scenarios under which at a fraction of the cost of the pension-asset- households will want to increase their savings management complex, and without demand- rate. The first scenario is demographic change. depressing, financializing consequences. This The combination of increasing life expectancy alternative may seem utopian today. However, and declining birthrates causes people to set creating the conditions for labor-friendly stew- aside more money today, partly because their ardship of labor’s capital is just as ambitious a post-retirement life will be longer, partly project. Short of a Promethean overhaul of the because slowing population growth depresses macro-financial architecture—think re-regula- yields. The second scenario is income concen- tion and public banking—labor-friendly capital tration. Since the wealthy consume a smaller stewardship is bound to remain a Sisyphean share of their income, channeling more income task. Braun 73 their way increases desired savings. The third economically targeted long-term investment; scenario encompasses policies that force house- passive ‘anchor’ ownership; and active corpo- holds to save more. The single most consequen- rate engagement.” They also argue, convinc- tial such policy is a funded pension regime. ingly, that pension funds cannot be ascribed The past half-century has been a perfect investment preferences independently of the storm. Societies across the world have grown meso-level institutional conditions under which older and more unequal. At the same time, and they operate, namely, pension fund financing often in reaction to the pressures demographic needs, governance capacities, and financial reg- and economic stagnation have placed on states’ ulations set by the government. redistributive capacity, the capitalization and privatization of pension systems have prolifer- Where there are large institutional ated. The resulting increase in long-term capital pools . . . there tend to be household savings has fueled the search for structural pressures that compel yield and the growth of the asset management these actors to “push the envelope sector—two core aspects of financialization. of existing investment norms.” What is missing from this analysis, however, Funded Pensions and is the macro-level. Here, the institutional condi- Financialization: Two Sides of tions for pension capital to be patient are the same the Same Coin as the institutional conditions for patient financial capital more generally. In the United States and Among the thorny issues discussed in the vast elsewhere, these conditions prevailed during the literature on the U.S. pension system are the three decades following World War II. As noted degree to which labor can control its capital, the by the historian Jonathan Levy, during this “age possibilities for using its control toward pro- of control,” the United States succeeded in gressive ends, and the individualization of risk “inducing, but never coercing, capital to fix and that comes with defined contribution plans. settle on the ground, long term, within national What is often lost in those debates, however, territories.” Perhaps not surprisingly, by the are the broader economic and financial conse- mid-1970s, the managers of institutional capital quences of what some scholars have called pools became key actors in overturning the con- “pension fund capitalism.” Rather than asking ditions of such (soft) financial repression. Where how labor can better wield what legal scholar there are large institutional capital pools—be David Webber has dubbed its “last best they sovereign wealth, endowment, or pension weapon,” this essay examines the structural funds—there tend to be structural pressures that forces that tend to make this weapon misfire. compel these actors to “push the envelope of existing investment norms.” Critics of pension When pension funds pushed into fund capitalism have long argued that rather than real estate assets for better returns, financing entrepreneurs and fostering growth, private equity firms delivered by pension money has “[inflated] capital markets in raising rents and evicting those that which unproductive takeover and corporate could not pay. restructuring activity flourishes, while industrial production and employment activity stagnate.” In principle, pension funds can be a source of At the same time, their capital feeds an asset long-term capital serving the local economy, management sector geared toward capitalizing an and they have historically played that role. ever-increasing share of economic activity, thus Social scientists Michael McCarthy, Ville- expanding the universe of investable assets. Pekka Sorsa, and Natascha van der Zwan have The need to push the envelope is hard-wired detailed what “patient” pension capital looks into the U.S. funded pension system, and the like in practice, listing “the provision of financ- reasons run deeper than financing needs or plan ing for long-term business operations; design. As pointed out by economic historian 74 New Labor Forum 31(1) Table 1. Five Stages of Pension Fund Financialization. Funded pensions with . . . . . . private-sector . . . private-sector . . . private- . . . private- assets: public assets: public and . . . public-sector sector assets: sector assets: equity—via asset private equity—via assets bonds public equity managers asset managers Labor’s capital’s Local Local Shareholder Shareholder value Shareholder value interest development development value and financial and financial and growth and growth liberalization liberalization Structural Low (financial Low (financial Medium (exit- High (exit, High (exit, voice power of repression) repression) based) voice and and control) finance control) Source. Benjamin Braun. Avner Offer, it is “never noticed” by advocates postwar period. At the same time, however, of market provision “that financial markets are pension capital was a major driver of that liber- not large enough to support welfare transfers.” alization and innovation. Throughout this Invariably, therefore, the supply of pension sav- period, it was far and away the largest institu- ings in search of investment outstrips demand tional capital pool that fueled the growth of for financing from the non-financial sector mutual, private equity, and hedge funds—in (firms, households, government). This mis- other words, of asset manager capitalism. match means that pension capital contributes to asset price inflation and to declining yields in Pension Fund Assets: From established, “conservative” asset classes, which Public and Local to Private in turn gives pension funds a strong incentive to and Global lobby state and federal governments to allow them to move into high-risk investment strate- The macro-financial regime of the postwar gies and asset classes. In this effort, they will period was characterized by substantial finan- invariably be supported by the asset manage- cial repression. Strict financial regulation and ment sector. controls on international capital mobility subor- dinated private finance to the interests of the non-financial and the public sectors. To the Once state governments gave in to extent funded pension systems existed, they pension trustees’ demands to open were “characterized by a close proximity high-yielding corporate securities to between the state and pension funds.” investment by pension funds, fiscal Accordingly, U.S. public pension funds held mutualism quickly went out the assets issued by the public sector, namely, trea- window. suries and municipal bonds (see Figure 1 on opening page). In what historians Michael This theory of “pushing the envelope” helps Glass and Sean Vanatta have aptly named “fis- explain the historical trajectory of pension cal mutualism,” New York public pension funds funds’ asset composition. As depicted in the top financed the construction of suburban schools row of Table 1 (to be read from left to right), (among other public infrastructure projects) by pension funds’ asset composition has steadily purchasing school district bonds at below-mar- moved from public, local, and development- ket yields (thereby financing white flight from oriented investments to more private, global, New York City). and predatory investments. To some extent, this Once state governments gave in to pension movement simply reflects financial liberaliza- trustees’ demands to open high-yielding corpo- tion and innovation over the course of the rate securities to investment by pension funds, Braun 75 fiscal mutualism quickly went out the window. are recipients of wage income today and capital It gave way to a regime under which pension income tomorrow—for-profit asset managers funds invested in securities issued by private are in the business, first and foremost, of maxi- corporations—bonds at first, then increasingly, mizing their own assets under management. and eventually predominantly, equities (see fig- This translates into a pursuit of shareholder ure 1, the opening graphic of this article). value in the case of actively investing asset When, during the 1970s, the U.S. economy managers and an overall preference for high confronted increasing international competi- asset valuations. Delegation thus adds an inves- tion, pension savings were heralded as a crucial tor-asset manager agency problem to the classic source of “patient capital”—capital willing to shareholder-manager agency problem—the support U.S. corporations in developing long- interests of asset managers are not aligned with term strategies to match those of their competi- those of pension fund beneficiaries. tors from corporatist Germany and Japan. The importance of labor’s capital for the However, as the shift into corporate equities growth of the mutual fund industry cannot be accelerated over the course of the 1980s and overstated. Figure 2, Panel A, shows the spec- 1990s, U.S. pension funds came to be catego- tacular growth of total retirement assets, from rized as the paradigmatic “impatient” investors $370 billion in 1974 to $35 trillion in 2021. Of whose power in the realm of corporate gover- the six main categories, individual retirement nance rested primarily in their ability to accounts (IRAs) and defined contribution plans (threaten to) exit individual holdings. (including 401(k)s) have seen the fastest growth in recent years. Panel B shows the growth of mutual fund assets, from $1 trillion in 1990 to . . . [A]rguably [the] most $26 trillion in 2021. Panel C shows the extent to controversial contribution of labor’s which the growth of mutual funds has been capital to the growth of asset fueled by retirement assets, whose share in total manager capitalism has been its mutual assets is up from 20 percent in 1990 to push into alternative asset classes. more than 50 percent in 2021. The growth of mutual funds in general, and The shift in pension fund investment from of providers of exchange-traded funds in par- public to private assets is well documented, but ticular—notably the three giants BlackRock, the drive to “push the envelope” in the search Vanguard, and State Street—has turned U.S. for risk-adjusted return has since continued. corporate share ownership and corporate gover- The first step was the delegation of investment nance upside down. Asset manager capitalism to external asset managers. Reliance on asset constitutes a distinct corporate governance managers, which began as early as the move regime, characterized by concentrated, yet into equities in the 1960s, accelerated in the diversified, shareholdings by for-profit asset 1980s in the wake of the Employee Retirement management companies with fee-based busi- Income Security Act of 1974 (ERISA), which ness models, with little interest in the economic imposed new “prudent man” and portfolio performance of individual portfolio firms. diversification requirements. Delegation to asset managers continued to increase through- . . . [L]abor’s capital [has become] out the 1990s and 2000s. a major protagonist in a radical By delegating portfolio management, pen- transformation of residential sion funds have handed much of the power real estate into an asset class for associated with stock ownership over to asset institutional capital pools . . . managers, whose interests are not generally aligned with those of labor’s capital. Unlike The most recent, and arguably most contro- pension funds, whose principals are somewhat versial, contribution of labor’s capital to the ambiguous about the distribution of income growth of asset manager capitalism has been its between capital and labor—their beneficiaries 76 New Labor Forum 31(1) Figure 3. Asset allocation of U.S. public pension funds. Source. Public Plans Data. Center for Retirement Research at Boston College, Center for State and Local Government Excellence, and National Association of State Retirement Administrators, 2021. Note. Cash holdings—which are small and invariant—are excluded for readability. push into alternative asset classes. In addition to in the Blackstone Property Partners Europe fund, seeking direct exposure to real estate and com- which invests in various types of real estate assets modity assets, public pension funds in particular across Europe, the two largest—committing have shifted large amounts of money into private $750 and $470 billion, respectively—are the equity and hedge funds. Figure 3 plots this shift California Public Employees’ Retirement System using data from 210 state and local pension plans (CalPERS) and the California State Teachers’ (accounting for 95 percent of state and local plan Retirement System. assets), divided into size quintiles. It shows that across size groups, public pension funds have To Make Things Better for roughly tripled their alternatives share, from Labor, Make Them Worse for under 10 percent in 2001 to 30 percent in 2020. Labor’s Capital As in the case of the end of fiscal mutualism in the 1960s, public pension funds’ move into hedge Today, asset managers rule supreme in the funds was not preordained but required regula- economy. Mutual and exchange-traded fund tory action. Up until 1996, hedge funds were pro- giants such as BlackRock and Vanguard domi- hibited from doing business with entities that had nate corporate governance, while private equity fewer than one hundred shareholders. Congress firms gobble up everything from elderly care eliminated this rule with the National Securities homes to single-family houses. The fodder on Markets Improvement Act of 1996, thus opening which these asset managers have grown so hedge funds to pension fund trustees. Private bulky was labor’s capital, and much of the equity funds have attracted even more public power they wield as shareholders has been won pension plan capital than hedge funds. They by pension fund activists. Business scholar channel this money into leveraged buyouts, Richard Marens’ “ironic conclusion” is there- whose profitability has long been known to be fore correct—pension fund activism has done achieved at the expense of worker wages, health, “more to assist the investment community than and safety. Private equity firms have also increas- the American labor movement.” This conclu- ingly invested in real estate assets across the sion may be ironic, but it is not surprising. The world, making labor’s capital a major protagonist reason the hopes of Barber and Rifkin have not in a radical transformation of residential real been fulfilled is that financial capital earmarked estate into an asset class for institutional capital for pensions is still financial capital in search of pools. For example, among the eight investors return, structurally geared toward “pushing the Braun 77 envelope” in terms of investment practices, Funding asset classes, and financial liberalization. The author(s) received no financial support for the research, authorship, and/or publication of this article. . . .[P]ension fund activism has done “more to assist the investment ORCID iD community than the American Benjamin Braun https://orcid.org/0000-0002 labor movement.” -5186-5923 The 35-trillion-dollar question, then, is Notes whether a viable path back to a version of the 1. Benjamin Braun, “From Exit to Control: fiscal mutualism of the early 1960s exists. As The Structural Power of Finance under Asset governments across the world are looking to Manager Capitalism,” SocArXiv, 2021, https:// finance the economic and technological trans- osf.io/preprints/socarxiv/4uesc. formations necessary for decarbonization, this 2. Ken-Hou Lin and Donald Tomaskovic-Devey, question could not be more urgent. Can labor’s “Financialization and U.S. Income Inequality, capital provide long-term patient capital for 1970-2008,” American Journal of Sociology public and private, but primarily local, develop- 118, no. 5 (2013): 1284-329; Lenore Palladino, ment-oriented, and green investment projects? “Financialization at Work: Shareholder The answer is yes, such a path exists, but it is Primacy and Stagnant Wages in the United rockier than the Barber-Rifkin tradition has States,” Competition & Change 25 (2021): 382- been ready to acknowledge. In a system in 400; Ignacio Alvarez, “Financialization, Non- Financial Corporations and Income Inequality: which financial return is structurally linked to The Case of France,” Socio-Economic Review predation, exercising labor power through capi- 13, no. 3 (2015): 449-75, doi:10.1093/ser/ tal stewardship is doomed to fail. Unlocking the mwv007. progressive promise of labor’s capital requires 3. Peter F. Drucker, The Unseen Revolution: How a macro-financial regime that strictly regulates Pension Fund Socialism Came to America finance and that allows for greater economic (New York: Harper & Row, 1976); Jeremy democracy. The public would play a much Rifkin and Randy Barber, The North Will Rise greater role in credit creation and allocation, Again: Pensions, Politics and Power in the labor’s capital would be uncoupled from 1980s (Boston, MA: Beacon Press, 1978). the for-profit asset management sector, and 4. Patrick Dixon, “Capital Strategies for the employee equity funds and other forms of Common Good: A Tool for Labor’s Revival,” New Labor Forum 30, no. 1 (2021): 60-68, mutual ownership would institutionalize profit- doi:10.1177/1095796020983010; David sharing and co-determination at the firm level. Webber, The Rise of the Working-Class On the transition path to such a “real utopia,” Shareholder: Labor’s Last Best Weapon funded pensions appear as an obstacle rather (Cambridge, MA: Harvard University Press, than a stepping stone because they create a 2018); Larry Liu and Adam Goldstein, “Labor’s sequencing problem—things would have to get Capital and Worker Well-Being: Do US Pension worse for labor’s capital before they get better Funds Benefit Labor Interests?” Social Forces, for labor. no. soab025 (March 31, 2021), doi:10.1093/ sf/soab025; Richard Marens, “Waiting for the Acknowledgments North to Rise: Revisiting Barber and Rifkin after a Generation of Union Financial Activism I would like to thank Philipp Golka, Sanford Jacoby, in the US,” Journal of Business Ethics 52, no. 1 Sean Vanatta, and Natascha van der Zwan, as well as (2004): 109-23. the editors, for their time and their constructive com- 5. On pension financialization, see, for example, ments on an earlier draft of this essay. Natascha van der Zwan, “Financialisation and the Pension System: Lessons from the United Declaration of Conflicting Interests States and the Netherlands,” Journal of Modern The author(s) declared no potential conflicts of inter- European History 15, no. 4 (2017): 554-84. For est with respect to the research, authorship, and/or recent comparative studies, see Marek Naczyk, publication of this article. “When Finance Captures Labor’s Capital: 78 New Labor Forum 31(1) Dominant Personal Pensions, Resurgent Wealth, and Global Imbalances in the Twenty- Occupational Provision in Central and Eastern First Century,” National Bureau of Economic Europe,” Social Policy & Administration 52, Research, 2021. no. 2 (2018): 549-62, doi:10.1111/spol.12383; 14. Atif Mian, Ludwig Straub, and Amir Sufi, Tobias Wiß, “Reinforcement of Pension “What Explains the Decline in R*? Rising Financialisation as a Response to Financial Income Inequality versus Demographic Shifts,” Crises in Germany, the Netherlands and the 2021, https://www.kansascityfed.org/docu- United Kingdom,” Journal of European Public ments/8337/JH_paper_Sufi_3.pdf. Policy 26, no. 4 (2019): 501-20; Natascha van 15. It is worth noting that pay-as-you-go systems der Zwan, “Modelos de Financiarización de are macroeconomically equivalent to funded Las Pensiones En Cuatro Estados de Bienestar pensions in that the value of retirement claims Europeos,” Revista Internacional de Sociología depends on the size of the economy at the point 78, no. 4 (December 15, 2020): e175, of retirement. doi:10.3989/ris.2020.78.4.m20.007. 16. See, for example, Sarah M. Brooks, 6. Thinking Ahead Institute, “Global Pension “Interdependent and Domestic Foundations Assets Study 2021,” 2021, https://www. of Policy Change: The Diffusion of Pension thinkingaheadinstitute.org/research-papers/ Privatization Around the World,” International global-pension-assets-study-2021/. Studies Quarterly 49, no. 2 (2005): 273-94, 7. Marek Naczyk, “Agents of Privatization? doi:10.1111/j.0020-8833.2005.00345.x. Business Groups and the Rise of Pension 17. Michael A. McCarthy, Dismantling Solidarity: Funds in Continental Europe,” Socio- Capitalist Politics and American Pensions Since Economic Review 11, no. 3 (01 2013): 441- the New Deal (Ithaca, NY: Cornell University 69, doi:10.1093/ser/mws012; Nils Röper, Press, 2017); Webber, The Rise of the Working- “Capitalists against Financialization: The Battle Class Shareholder; Jacob S. Hacker, The Great over German Pension Funds,” Competition & Risk Shift: The New Economic Insecurity and nd Change 25, no. 3-4 (July 1, 2021): 428-52, the Decline of the American Dream, rev. 2 doi:10.1177/1024529421993005. ed. (New York: Oxford University Press, 8. David Weil, The Fissured Workplace (Cambridge, 2019); Liu and Goldstein, “Labor’s Capital MA: Harvard University Press, 2014). and Worker Well-Being”; Sanford M. Jacoby, 9. Brett Christophers, “How and Why U.S. Single- Labor in the Age of Finance: Pensions, Politics, Family Housing Became an Investor Asset and Corporations from Deindustrialization to Class,” Journal of Urban History, Advance Dodd-Frank (Princeton: Princeton University online publication (2021). Press, 2021). 10. See Robert C. Hockett, “Labor’s Capital: Why 18. See, for example, Jan Toporowski, The End of and How to Put Public Capital at the Service Finance: Capital Market Inflation, Financial of Labor,” New Labor Forum 30, no. 1 (2021): Derivatives and Pension Fund Capitalism 20-31, doi:10.1177/1095796020983317; (London: Routledge, 2000); Adam D. Dixon, Daniela Gabor, “Critical Macro-Finance: A “The Rise of Pension Fund Capitalism in Theoretical Lens,” Finance and Society 6, no. Europe: An Unseen Revolution?” New 1 (2020): 45-55. Political Economy 13, no. 3 (2008): 249-70, 11. Greta R. Krippner, Capitalizing on Crisis. doi:10.1080/13563460802302560; Gordon The Political Origins of the Rise of Finance L. Clark, Pension Fund Capitalism (Oxford: (Cambridge, MA: Harvard University Press, Oxford University Press, 2000); Dirk Bezemer, 2011). “Pension Fund Capitalism: A Case Study 12. As does the political economy literature, his- of the Netherlands,” IMK Working Paper torians of the longue durée of capitalism point (Duesseldorf: Hans Boeckler Foundation, to the exhaustion of a previously successful forthcoming). economic model as chief catalyst of financial- 19. Michael A. McCarthy, Ville-Pekka Sorsa, ization. However, unlike the political econ- and Natascha van der Zwan, “Investment omy literature, the work of historians such as Preferences and Patient Capital: Financing, Braudel, Arrighi, and Bas van Bavel shifts from Governance, and Regulation in Pension Fund the demand for, to the supply of, financial capi- Capitalism,” Socio-Economic Review 14, no. 4 tal as the driving force of financialization. (2016): 753-69. 13. Adrien Auclert, Hannes Malmberg, Frederic 20. McCarthy et al., “Investment Preferences and Martenet and Matthew Rognlie, “Demographics, Patient Capital,” 754. Braun 79 21. Jonathan Levy, Ages of American Capitalism: 31. Webber, The Rise of the Working-Class A History of the United States (New York: Shareholder, 84. Random House, 2021), 396. 32. Brett Christophers, “Mind the Rent Gap: 22. Ewald Engelen, “The Logic of Funding Blackstone, Housing Investment and the European Pension Restructuring and the Reordering of Urban Rent Surfaces,” Urban Dangers of Financialisation,” Environment and Studies, Advance online publication (August Planning A 35, no. 8 (2003): 1366. 11, 2021); Desiree Fields and Sabina Uffer, 23. Toporowski, The End of Finance, 53. “The Financialisation of Rental Housing: A 24. Avner Offer, “The Market Turn: From Social Comparative Analysis of New York City and Democracy to Market Liberalism,” The Economic Berlin,” Urban Studies 53, no. 7 (2016): 1486- History Review 70, no. 4 (2017): 1055. 502; Daniela Gabor and Sebastian Kohl, “My 25. van der Zwan, “Financialisation and the Pension Home Is an Asset Class: The Financialization System Lessons from the United States and the of Housing in Europe” (Report for the Greens/ Netherlands,” 577. European Free Alliance in the European 26. Michael R. Glass and Sean H. Vanatta, “The Parliament, forthcoming. Frail Bonds of Liberalism: Pensions, Schools, 33. Gabor and Kohl, “My Home Is an Asset Class,” 42. and the Unraveling of Fiscal Mutualism in 34. Marens, “Waiting for the North to Rise,” 109. Postwar New York,” Capitalism: A Journal of He further notes (p. 10) that pension fund initia- History and Economics 2, no. 2 (2021): 427-72. tives “have helped loosen the investment con- 27. Peter A. Hall and David Soskice, “An straints imposed on financial fiduciaries” and Introduction to Varieties of Capitalism,” in “make it easier for other shareholder activists Varieties of Capitalism. The Institutional to communicate with each other and to con- Foundations of Comparative Advantage, ed. front, and even effectively oppose, corporate Peter A. Hall and David Soskice (Oxford: management.” Oxford University Press, 2001), 1-68. 35. On employee equity funds, see Lenore 28. On the consequences ERISA, see Sabine Palladino, “The Potential Benefits of Employee Montagne, “Investing Prudently: How Equity Funds in the United States,” Journal Financialization Puts a Legal Standard to Use,” of Participation and Employee Ownership, Sociologie du Travail 55, no. Supplement 1 Advance online publication 2021. On democ- (2013): 48-66; van der Zwan, “Financialisation racy at the firm level, see Isabelle Ferreras, and the Pension System: Lessons from the Firms as Political Entities: Saving Democracy United States and the Netherlands,” 566. through Economic Bicameralism (Cambridge: 29. See, for example, Lucian A. Bebchuk, Alma Cambridge University Press, 2017). Cohen, and Scott Hirst, “The Agency Problems of Institutional Investors,” Journal of Economic Author’s Biography Perspectives 31, no. 3 (2017): 89-102. 30. Benjamin Braun, “Asset Manager Capitalism Benjamin Braun is a senior researcher at the Max as a Corporate Governance Regime,” in The Planck Institute for the Study of Societies in Cologne, American Political Economy: Politics, Markets, Germany. His current research focuses on the politi- and Power, ed. Jacob Hacker, Alexander Hertel- cal economy of asset manager capitalism. His work Fernandez, Paul Pierson, Kathleen Thelen has been published, among others, in New Political (Cambridge: Cambridge University Press, Economy, Review of International Political 2021), https://osf.io/preprints/socarxiv/v6gue/. Economy, and Socio-Economic Review. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png New Labor Forum SAGE

Fueling Financialization: The Economic Consequences of Funded Pensions:

Braun, Benjamin
New Labor Forum , Volume 31 (1): 10 – Dec 4, 2021
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Abstract

Figure 1. Composition of U.S. Pension Fund Assets, 1945-2020. Marginal categories excluded for readability are money market fund shares, deposits and currency, and loans. The main component of “Total miscellaneous assets” are claims on the pension plan sponsor. The data include private pension funds, state and local government employee retirement funds, and federal government retirement funds. IRA assets are not included. 1062218 NLFXXX10.1177/10957960211062218New Labor ForumBraun research-article2021 New Labor Forum 2022, Vol. 31(1) 70 –79 Fueling Financialization: Copyright © 2021, The Murphy Institute, The Economic Consequences CUNY School of Labor and Urban Studies Article reuse guidelines: https://doi.org/10.1177/10957960211062218 of Funded Pensions sagepub.com/journals-permissions DOI: 10.1177/10957960211062218 journals.sagepub.com/home/nlf Benjamin Braun Keywords pension funds, financialization, asset manager capitalism, capital stewardship, labor’s capital The financial sector, whether measured by its same time, ever since Peter Drucker’s warning total assets or its value-added share of gross of the coming of “pension fund socialism” was domestic product (GDP), has never been a more countered by Jeremy Rifkin and Randy Barber’s formidable force in the U.S. economy. The positive vision of labor’s capital as an instru- upswing in financialization since the 1970s has ment of labor power, the latter has gripped the coincided with the steady accumulation of long- imagination of scholars and labor organizers. term retirement savings and their consolidation Indeed, the past two decades have seen an in institutional capital pools. Pension fund impressive increase in pro-worker activism by demand for high-yield, long-term financial public-sector and multi-employer, collectively claims has acted as a catalyst for financializa- bargained plans known as Taft-Hartley pension tion, understood as the reorganization of owner- funds, and a lively debate is taking place about ship relations and economic activity in ways the prospects for “capital stewardship” to deliver that serve the needs of institutional capital pools. results for U.S. workers. In this context, I argue In the driver’s seat of this reorganization sits a that the ongoing debate about meso-level pros- financial sector whose primary function has pects for labor’s capital under-appreciates the shifted from financing investment to preserving macro-level consequences of U.S. funded pen- wealth, along with a shift in institutional form sions as the world’s single most consequential from banks to asset managers. Under this “asset financializing force over the past half-century. manager capitalism,” the dominant figures on Wall Street are no longer the CEOs of the big Standing at $35 trillion in 2021. . . banks but figures such as Larry Fink or Stephen U.S. pension assets account for 62 Schwarzman, the CEOs of BlackRock and percent of global pension assets. Blackstone, respectively. Asset managers’ This money has fueled the growth power is most visible vis-à-vis listed corpora- of the asset management sector . . . tions—that is, in corporate governance—but it reaches much further. Closely held companies, My intention is not to blame global finan- residential real estate, infrastructure, land— cialization on U.S. labor. The rise of funded there is no sector that asset managers have not pensions is a multi-causal, global phenome- made accessible for financial capital and where non. Rather, my purpose is to place funded they do not exercise substantial structural power, pension systems and their institutional capital often through outright control. pools where they belong—at the center of the For labor, the consequences of financializa- history of financialization and asset manager tion and the rise of asset manager capitalism have been dire. Countless empirical studies have documented correlations between various Max Planck Institute for the Study of Societies, Cologne, Germany measures of financialization, such as payouts to shareholders, and various measures of income Corresponding Author: and wealth inequality, such as wages. At the Benjamin Braun, bb@mpifg.de 72 New Labor Forum 31(1) Figure 2. Retirement assets and their importance for the mutual fund sector. Source. Investment Company Institute, U.S. Retirement Market, second quarter 2021. Note. Roughly, one-third of total retirement assets are invested in mutual fund shares. Panel C shows that that third accounts for more than 50 percent of the mutual fund sector’s assets under management. DC = defined contribution; DB = defined benefit. capitalism. Standing at $35 trillion in 2021 (see Financialization Figure 2, panel A), U.S. pension assets account Financialization in the United States has been for 62 percent of global pension assets. For explained as the result of the exhaustion of the almost half a century, this money has fueled the Fordist growth model. Competition in interna- growth of the asset management sector, which tional trade, de-industrialization, and disinfla- in many countries has actively lobbied for pen- tionary policies all put pressure on political sion privatization. When pension fund activ- actors to liberalize finance so that newly cre- ism brought corporate governance reform, ated credit could substitute for stagnating wage corporations’ quest for shareholder value income and sustain aggregated demand. brought workplace fissuring and wage stagna- However, as historians Fernand Braudel and tion. When pension funds pushed into real Giovanni Arrighi have argued, financialization estate assets for better returns, private equity has been a recurring feature of capitalist devel- firms delivered by raising rents and evicting opment. It tends to be driven by a slowdown of those that could not pay. accumulation that makes reinvesting profits in The argument is thus directed not against immobile productive capital relatively less specific pension fund investment practices but attractive to capitalists, who instead seek against funded pensions tout court. The alterna- returns from liquid financial claims. tive is a pay-as-you-go (PAYGO) system that Taking as given a certain level of national redistributes money from the young to the old, income, there are three scenarios under which at a fraction of the cost of the pension-asset- households will want to increase their savings management complex, and without demand- rate. The first scenario is demographic change. depressing, financializing consequences. This The combination of increasing life expectancy alternative may seem utopian today. However, and declining birthrates causes people to set creating the conditions for labor-friendly stew- aside more money today, partly because their ardship of labor’s capital is just as ambitious a post-retirement life will be longer, partly project. Short of a Promethean overhaul of the because slowing population growth depresses macro-financial architecture—think re-regula- yields. The second scenario is income concen- tion and public banking—labor-friendly capital tration. Since the wealthy consume a smaller stewardship is bound to remain a Sisyphean share of their income, channeling more income task. Braun 73 their way increases desired savings. The third economically targeted long-term investment; scenario encompasses policies that force house- passive ‘anchor’ ownership; and active corpo- holds to save more. The single most consequen- rate engagement.” They also argue, convinc- tial such policy is a funded pension regime. ingly, that pension funds cannot be ascribed The past half-century has been a perfect investment preferences independently of the storm. Societies across the world have grown meso-level institutional conditions under which older and more unequal. At the same time, and they operate, namely, pension fund financing often in reaction to the pressures demographic needs, governance capacities, and financial reg- and economic stagnation have placed on states’ ulations set by the government. redistributive capacity, the capitalization and privatization of pension systems have prolifer- Where there are large institutional ated. The resulting increase in long-term capital pools . . . there tend to be household savings has fueled the search for structural pressures that compel yield and the growth of the asset management these actors to “push the envelope sector—two core aspects of financialization. of existing investment norms.” What is missing from this analysis, however, Funded Pensions and is the macro-level. Here, the institutional condi- Financialization: Two Sides of tions for pension capital to be patient are the same the Same Coin as the institutional conditions for patient financial capital more generally. In the United States and Among the thorny issues discussed in the vast elsewhere, these conditions prevailed during the literature on the U.S. pension system are the three decades following World War II. As noted degree to which labor can control its capital, the by the historian Jonathan Levy, during this “age possibilities for using its control toward pro- of control,” the United States succeeded in gressive ends, and the individualization of risk “inducing, but never coercing, capital to fix and that comes with defined contribution plans. settle on the ground, long term, within national What is often lost in those debates, however, territories.” Perhaps not surprisingly, by the are the broader economic and financial conse- mid-1970s, the managers of institutional capital quences of what some scholars have called pools became key actors in overturning the con- “pension fund capitalism.” Rather than asking ditions of such (soft) financial repression. Where how labor can better wield what legal scholar there are large institutional capital pools—be David Webber has dubbed its “last best they sovereign wealth, endowment, or pension weapon,” this essay examines the structural funds—there tend to be structural pressures that forces that tend to make this weapon misfire. compel these actors to “push the envelope of existing investment norms.” Critics of pension When pension funds pushed into fund capitalism have long argued that rather than real estate assets for better returns, financing entrepreneurs and fostering growth, private equity firms delivered by pension money has “[inflated] capital markets in raising rents and evicting those that which unproductive takeover and corporate could not pay. restructuring activity flourishes, while industrial production and employment activity stagnate.” In principle, pension funds can be a source of At the same time, their capital feeds an asset long-term capital serving the local economy, management sector geared toward capitalizing an and they have historically played that role. ever-increasing share of economic activity, thus Social scientists Michael McCarthy, Ville- expanding the universe of investable assets. Pekka Sorsa, and Natascha van der Zwan have The need to push the envelope is hard-wired detailed what “patient” pension capital looks into the U.S. funded pension system, and the like in practice, listing “the provision of financ- reasons run deeper than financing needs or plan ing for long-term business operations; design. As pointed out by economic historian 74 New Labor Forum 31(1) Table 1. Five Stages of Pension Fund Financialization. Funded pensions with . . . . . . private-sector . . . private-sector . . . private- . . . private- assets: public assets: public and . . . public-sector sector assets: sector assets: equity—via asset private equity—via assets bonds public equity managers asset managers Labor’s capital’s Local Local Shareholder Shareholder value Shareholder value interest development development value and financial and financial and growth and growth liberalization liberalization Structural Low (financial Low (financial Medium (exit- High (exit, High (exit, voice power of repression) repression) based) voice and and control) finance control) Source. Benjamin Braun. Avner Offer, it is “never noticed” by advocates postwar period. At the same time, however, of market provision “that financial markets are pension capital was a major driver of that liber- not large enough to support welfare transfers.” alization and innovation. Throughout this Invariably, therefore, the supply of pension sav- period, it was far and away the largest institu- ings in search of investment outstrips demand tional capital pool that fueled the growth of for financing from the non-financial sector mutual, private equity, and hedge funds—in (firms, households, government). This mis- other words, of asset manager capitalism. match means that pension capital contributes to asset price inflation and to declining yields in Pension Fund Assets: From established, “conservative” asset classes, which Public and Local to Private in turn gives pension funds a strong incentive to and Global lobby state and federal governments to allow them to move into high-risk investment strate- The macro-financial regime of the postwar gies and asset classes. In this effort, they will period was characterized by substantial finan- invariably be supported by the asset manage- cial repression. Strict financial regulation and ment sector. controls on international capital mobility subor- dinated private finance to the interests of the non-financial and the public sectors. To the Once state governments gave in to extent funded pension systems existed, they pension trustees’ demands to open were “characterized by a close proximity high-yielding corporate securities to between the state and pension funds.” investment by pension funds, fiscal Accordingly, U.S. public pension funds held mutualism quickly went out the assets issued by the public sector, namely, trea- window. suries and municipal bonds (see Figure 1 on opening page). In what historians Michael This theory of “pushing the envelope” helps Glass and Sean Vanatta have aptly named “fis- explain the historical trajectory of pension cal mutualism,” New York public pension funds funds’ asset composition. As depicted in the top financed the construction of suburban schools row of Table 1 (to be read from left to right), (among other public infrastructure projects) by pension funds’ asset composition has steadily purchasing school district bonds at below-mar- moved from public, local, and development- ket yields (thereby financing white flight from oriented investments to more private, global, New York City). and predatory investments. To some extent, this Once state governments gave in to pension movement simply reflects financial liberaliza- trustees’ demands to open high-yielding corpo- tion and innovation over the course of the rate securities to investment by pension funds, Braun 75 fiscal mutualism quickly went out the window. are recipients of wage income today and capital It gave way to a regime under which pension income tomorrow—for-profit asset managers funds invested in securities issued by private are in the business, first and foremost, of maxi- corporations—bonds at first, then increasingly, mizing their own assets under management. and eventually predominantly, equities (see fig- This translates into a pursuit of shareholder ure 1, the opening graphic of this article). value in the case of actively investing asset When, during the 1970s, the U.S. economy managers and an overall preference for high confronted increasing international competi- asset valuations. Delegation thus adds an inves- tion, pension savings were heralded as a crucial tor-asset manager agency problem to the classic source of “patient capital”—capital willing to shareholder-manager agency problem—the support U.S. corporations in developing long- interests of asset managers are not aligned with term strategies to match those of their competi- those of pension fund beneficiaries. tors from corporatist Germany and Japan. The importance of labor’s capital for the However, as the shift into corporate equities growth of the mutual fund industry cannot be accelerated over the course of the 1980s and overstated. Figure 2, Panel A, shows the spec- 1990s, U.S. pension funds came to be catego- tacular growth of total retirement assets, from rized as the paradigmatic “impatient” investors $370 billion in 1974 to $35 trillion in 2021. Of whose power in the realm of corporate gover- the six main categories, individual retirement nance rested primarily in their ability to accounts (IRAs) and defined contribution plans (threaten to) exit individual holdings. (including 401(k)s) have seen the fastest growth in recent years. Panel B shows the growth of mutual fund assets, from $1 trillion in 1990 to . . . [A]rguably [the] most $26 trillion in 2021. Panel C shows the extent to controversial contribution of labor’s which the growth of mutual funds has been capital to the growth of asset fueled by retirement assets, whose share in total manager capitalism has been its mutual assets is up from 20 percent in 1990 to push into alternative asset classes. more than 50 percent in 2021. The growth of mutual funds in general, and The shift in pension fund investment from of providers of exchange-traded funds in par- public to private assets is well documented, but ticular—notably the three giants BlackRock, the drive to “push the envelope” in the search Vanguard, and State Street—has turned U.S. for risk-adjusted return has since continued. corporate share ownership and corporate gover- The first step was the delegation of investment nance upside down. Asset manager capitalism to external asset managers. Reliance on asset constitutes a distinct corporate governance managers, which began as early as the move regime, characterized by concentrated, yet into equities in the 1960s, accelerated in the diversified, shareholdings by for-profit asset 1980s in the wake of the Employee Retirement management companies with fee-based busi- Income Security Act of 1974 (ERISA), which ness models, with little interest in the economic imposed new “prudent man” and portfolio performance of individual portfolio firms. diversification requirements. Delegation to asset managers continued to increase through- . . . [L]abor’s capital [has become] out the 1990s and 2000s. a major protagonist in a radical By delegating portfolio management, pen- transformation of residential sion funds have handed much of the power real estate into an asset class for associated with stock ownership over to asset institutional capital pools . . . managers, whose interests are not generally aligned with those of labor’s capital. Unlike The most recent, and arguably most contro- pension funds, whose principals are somewhat versial, contribution of labor’s capital to the ambiguous about the distribution of income growth of asset manager capitalism has been its between capital and labor—their beneficiaries 76 New Labor Forum 31(1) Figure 3. Asset allocation of U.S. public pension funds. Source. Public Plans Data. Center for Retirement Research at Boston College, Center for State and Local Government Excellence, and National Association of State Retirement Administrators, 2021. Note. Cash holdings—which are small and invariant—are excluded for readability. push into alternative asset classes. In addition to in the Blackstone Property Partners Europe fund, seeking direct exposure to real estate and com- which invests in various types of real estate assets modity assets, public pension funds in particular across Europe, the two largest—committing have shifted large amounts of money into private $750 and $470 billion, respectively—are the equity and hedge funds. Figure 3 plots this shift California Public Employees’ Retirement System using data from 210 state and local pension plans (CalPERS) and the California State Teachers’ (accounting for 95 percent of state and local plan Retirement System. assets), divided into size quintiles. It shows that across size groups, public pension funds have To Make Things Better for roughly tripled their alternatives share, from Labor, Make Them Worse for under 10 percent in 2001 to 30 percent in 2020. Labor’s Capital As in the case of the end of fiscal mutualism in the 1960s, public pension funds’ move into hedge Today, asset managers rule supreme in the funds was not preordained but required regula- economy. Mutual and exchange-traded fund tory action. Up until 1996, hedge funds were pro- giants such as BlackRock and Vanguard domi- hibited from doing business with entities that had nate corporate governance, while private equity fewer than one hundred shareholders. Congress firms gobble up everything from elderly care eliminated this rule with the National Securities homes to single-family houses. The fodder on Markets Improvement Act of 1996, thus opening which these asset managers have grown so hedge funds to pension fund trustees. Private bulky was labor’s capital, and much of the equity funds have attracted even more public power they wield as shareholders has been won pension plan capital than hedge funds. They by pension fund activists. Business scholar channel this money into leveraged buyouts, Richard Marens’ “ironic conclusion” is there- whose profitability has long been known to be fore correct—pension fund activism has done achieved at the expense of worker wages, health, “more to assist the investment community than and safety. Private equity firms have also increas- the American labor movement.” This conclu- ingly invested in real estate assets across the sion may be ironic, but it is not surprising. The world, making labor’s capital a major protagonist reason the hopes of Barber and Rifkin have not in a radical transformation of residential real been fulfilled is that financial capital earmarked estate into an asset class for institutional capital for pensions is still financial capital in search of pools. For example, among the eight investors return, structurally geared toward “pushing the Braun 77 envelope” in terms of investment practices, Funding asset classes, and financial liberalization. The author(s) received no financial support for the research, authorship, and/or publication of this article. . . .[P]ension fund activism has done “more to assist the investment ORCID iD community than the American Benjamin Braun https://orcid.org/0000-0002 labor movement.” -5186-5923 The 35-trillion-dollar question, then, is Notes whether a viable path back to a version of the 1. Benjamin Braun, “From Exit to Control: fiscal mutualism of the early 1960s exists. As The Structural Power of Finance under Asset governments across the world are looking to Manager Capitalism,” SocArXiv, 2021, https:// finance the economic and technological trans- osf.io/preprints/socarxiv/4uesc. formations necessary for decarbonization, this 2. Ken-Hou Lin and Donald Tomaskovic-Devey, question could not be more urgent. Can labor’s “Financialization and U.S. Income Inequality, capital provide long-term patient capital for 1970-2008,” American Journal of Sociology public and private, but primarily local, develop- 118, no. 5 (2013): 1284-329; Lenore Palladino, ment-oriented, and green investment projects? “Financialization at Work: Shareholder The answer is yes, such a path exists, but it is Primacy and Stagnant Wages in the United rockier than the Barber-Rifkin tradition has States,” Competition & Change 25 (2021): 382- been ready to acknowledge. In a system in 400; Ignacio Alvarez, “Financialization, Non- Financial Corporations and Income Inequality: which financial return is structurally linked to The Case of France,” Socio-Economic Review predation, exercising labor power through capi- 13, no. 3 (2015): 449-75, doi:10.1093/ser/ tal stewardship is doomed to fail. Unlocking the mwv007. progressive promise of labor’s capital requires 3. Peter F. Drucker, The Unseen Revolution: How a macro-financial regime that strictly regulates Pension Fund Socialism Came to America finance and that allows for greater economic (New York: Harper & Row, 1976); Jeremy democracy. The public would play a much Rifkin and Randy Barber, The North Will Rise greater role in credit creation and allocation, Again: Pensions, Politics and Power in the labor’s capital would be uncoupled from 1980s (Boston, MA: Beacon Press, 1978). the for-profit asset management sector, and 4. Patrick Dixon, “Capital Strategies for the employee equity funds and other forms of Common Good: A Tool for Labor’s Revival,” New Labor Forum 30, no. 1 (2021): 60-68, mutual ownership would institutionalize profit- doi:10.1177/1095796020983010; David sharing and co-determination at the firm level. Webber, The Rise of the Working-Class On the transition path to such a “real utopia,” Shareholder: Labor’s Last Best Weapon funded pensions appear as an obstacle rather (Cambridge, MA: Harvard University Press, than a stepping stone because they create a 2018); Larry Liu and Adam Goldstein, “Labor’s sequencing problem—things would have to get Capital and Worker Well-Being: Do US Pension worse for labor’s capital before they get better Funds Benefit Labor Interests?” Social Forces, for labor. no. soab025 (March 31, 2021), doi:10.1093/ sf/soab025; Richard Marens, “Waiting for the Acknowledgments North to Rise: Revisiting Barber and Rifkin after a Generation of Union Financial Activism I would like to thank Philipp Golka, Sanford Jacoby, in the US,” Journal of Business Ethics 52, no. 1 Sean Vanatta, and Natascha van der Zwan, as well as (2004): 109-23. the editors, for their time and their constructive com- 5. On pension financialization, see, for example, ments on an earlier draft of this essay. Natascha van der Zwan, “Financialisation and the Pension System: Lessons from the United Declaration of Conflicting Interests States and the Netherlands,” Journal of Modern The author(s) declared no potential conflicts of inter- European History 15, no. 4 (2017): 554-84. For est with respect to the research, authorship, and/or recent comparative studies, see Marek Naczyk, publication of this article. “When Finance Captures Labor’s Capital: 78 New Labor Forum 31(1) Dominant Personal Pensions, Resurgent Wealth, and Global Imbalances in the Twenty- Occupational Provision in Central and Eastern First Century,” National Bureau of Economic Europe,” Social Policy & Administration 52, Research, 2021. no. 2 (2018): 549-62, doi:10.1111/spol.12383; 14. Atif Mian, Ludwig Straub, and Amir Sufi, Tobias Wiß, “Reinforcement of Pension “What Explains the Decline in R*? Rising Financialisation as a Response to Financial Income Inequality versus Demographic Shifts,” Crises in Germany, the Netherlands and the 2021, https://www.kansascityfed.org/docu- United Kingdom,” Journal of European Public ments/8337/JH_paper_Sufi_3.pdf. Policy 26, no. 4 (2019): 501-20; Natascha van 15. It is worth noting that pay-as-you-go systems der Zwan, “Modelos de Financiarización de are macroeconomically equivalent to funded Las Pensiones En Cuatro Estados de Bienestar pensions in that the value of retirement claims Europeos,” Revista Internacional de Sociología depends on the size of the economy at the point 78, no. 4 (December 15, 2020): e175, of retirement. doi:10.3989/ris.2020.78.4.m20.007. 16. See, for example, Sarah M. Brooks, 6. Thinking Ahead Institute, “Global Pension “Interdependent and Domestic Foundations Assets Study 2021,” 2021, https://www. of Policy Change: The Diffusion of Pension thinkingaheadinstitute.org/research-papers/ Privatization Around the World,” International global-pension-assets-study-2021/. Studies Quarterly 49, no. 2 (2005): 273-94, 7. Marek Naczyk, “Agents of Privatization? doi:10.1111/j.0020-8833.2005.00345.x. Business Groups and the Rise of Pension 17. Michael A. McCarthy, Dismantling Solidarity: Funds in Continental Europe,” Socio- Capitalist Politics and American Pensions Since Economic Review 11, no. 3 (01 2013): 441- the New Deal (Ithaca, NY: Cornell University 69, doi:10.1093/ser/mws012; Nils Röper, Press, 2017); Webber, The Rise of the Working- “Capitalists against Financialization: The Battle Class Shareholder; Jacob S. Hacker, The Great over German Pension Funds,” Competition & Risk Shift: The New Economic Insecurity and nd Change 25, no. 3-4 (July 1, 2021): 428-52, the Decline of the American Dream, rev. 2 doi:10.1177/1024529421993005. ed. (New York: Oxford University Press, 8. David Weil, The Fissured Workplace (Cambridge, 2019); Liu and Goldstein, “Labor’s Capital MA: Harvard University Press, 2014). and Worker Well-Being”; Sanford M. Jacoby, 9. Brett Christophers, “How and Why U.S. Single- Labor in the Age of Finance: Pensions, Politics, Family Housing Became an Investor Asset and Corporations from Deindustrialization to Class,” Journal of Urban History, Advance Dodd-Frank (Princeton: Princeton University online publication (2021). Press, 2021). 10. See Robert C. Hockett, “Labor’s Capital: Why 18. See, for example, Jan Toporowski, The End of and How to Put Public Capital at the Service Finance: Capital Market Inflation, Financial of Labor,” New Labor Forum 30, no. 1 (2021): Derivatives and Pension Fund Capitalism 20-31, doi:10.1177/1095796020983317; (London: Routledge, 2000); Adam D. Dixon, Daniela Gabor, “Critical Macro-Finance: A “The Rise of Pension Fund Capitalism in Theoretical Lens,” Finance and Society 6, no. Europe: An Unseen Revolution?” New 1 (2020): 45-55. Political Economy 13, no. 3 (2008): 249-70, 11. Greta R. Krippner, Capitalizing on Crisis. doi:10.1080/13563460802302560; Gordon The Political Origins of the Rise of Finance L. Clark, Pension Fund Capitalism (Oxford: (Cambridge, MA: Harvard University Press, Oxford University Press, 2000); Dirk Bezemer, 2011). “Pension Fund Capitalism: A Case Study 12. As does the political economy literature, his- of the Netherlands,” IMK Working Paper torians of the longue durée of capitalism point (Duesseldorf: Hans Boeckler Foundation, to the exhaustion of a previously successful forthcoming). economic model as chief catalyst of financial- 19. Michael A. McCarthy, Ville-Pekka Sorsa, ization. However, unlike the political econ- and Natascha van der Zwan, “Investment omy literature, the work of historians such as Preferences and Patient Capital: Financing, Braudel, Arrighi, and Bas van Bavel shifts from Governance, and Regulation in Pension Fund the demand for, to the supply of, financial capi- Capitalism,” Socio-Economic Review 14, no. 4 tal as the driving force of financialization. (2016): 753-69. 13. Adrien Auclert, Hannes Malmberg, Frederic 20. McCarthy et al., “Investment Preferences and Martenet and Matthew Rognlie, “Demographics, Patient Capital,” 754. Braun 79 21. Jonathan Levy, Ages of American Capitalism: 31. Webber, The Rise of the Working-Class A History of the United States (New York: Shareholder, 84. Random House, 2021), 396. 32. Brett Christophers, “Mind the Rent Gap: 22. Ewald Engelen, “The Logic of Funding Blackstone, Housing Investment and the European Pension Restructuring and the Reordering of Urban Rent Surfaces,” Urban Dangers of Financialisation,” Environment and Studies, Advance online publication (August Planning A 35, no. 8 (2003): 1366. 11, 2021); Desiree Fields and Sabina Uffer, 23. Toporowski, The End of Finance, 53. “The Financialisation of Rental Housing: A 24. Avner Offer, “The Market Turn: From Social Comparative Analysis of New York City and Democracy to Market Liberalism,” The Economic Berlin,” Urban Studies 53, no. 7 (2016): 1486- History Review 70, no. 4 (2017): 1055. 502; Daniela Gabor and Sebastian Kohl, “My 25. van der Zwan, “Financialisation and the Pension Home Is an Asset Class: The Financialization System Lessons from the United States and the of Housing in Europe” (Report for the Greens/ Netherlands,” 577. European Free Alliance in the European 26. Michael R. Glass and Sean H. Vanatta, “The Parliament, forthcoming. Frail Bonds of Liberalism: Pensions, Schools, 33. Gabor and Kohl, “My Home Is an Asset Class,” 42. and the Unraveling of Fiscal Mutualism in 34. Marens, “Waiting for the North to Rise,” 109. Postwar New York,” Capitalism: A Journal of He further notes (p. 10) that pension fund initia- History and Economics 2, no. 2 (2021): 427-72. tives “have helped loosen the investment con- 27. Peter A. Hall and David Soskice, “An straints imposed on financial fiduciaries” and Introduction to Varieties of Capitalism,” in “make it easier for other shareholder activists Varieties of Capitalism. The Institutional to communicate with each other and to con- Foundations of Comparative Advantage, ed. front, and even effectively oppose, corporate Peter A. Hall and David Soskice (Oxford: management.” Oxford University Press, 2001), 1-68. 35. On employee equity funds, see Lenore 28. On the consequences ERISA, see Sabine Palladino, “The Potential Benefits of Employee Montagne, “Investing Prudently: How Equity Funds in the United States,” Journal Financialization Puts a Legal Standard to Use,” of Participation and Employee Ownership, Sociologie du Travail 55, no. Supplement 1 Advance online publication 2021. On democ- (2013): 48-66; van der Zwan, “Financialisation racy at the firm level, see Isabelle Ferreras, and the Pension System: Lessons from the Firms as Political Entities: Saving Democracy United States and the Netherlands,” 566. through Economic Bicameralism (Cambridge: 29. See, for example, Lucian A. Bebchuk, Alma Cambridge University Press, 2017). Cohen, and Scott Hirst, “The Agency Problems of Institutional Investors,” Journal of Economic Author’s Biography Perspectives 31, no. 3 (2017): 89-102. 30. Benjamin Braun, “Asset Manager Capitalism Benjamin Braun is a senior researcher at the Max as a Corporate Governance Regime,” in The Planck Institute for the Study of Societies in Cologne, American Political Economy: Politics, Markets, Germany. His current research focuses on the politi- and Power, ed. Jacob Hacker, Alexander Hertel- cal economy of asset manager capitalism. His work Fernandez, Paul Pierson, Kathleen Thelen has been published, among others, in New Political (Cambridge: Cambridge University Press, Economy, Review of International Political 2021), https://osf.io/preprints/socarxiv/v6gue/. Economy, and Socio-Economic Review.

Journal

New Labor Forum – SAGE

Published: Dec 4, 2021

Keywords: pension funds; financialization; asset manager capitalism; capital stewardship; labor’s capital

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