What The Hell America!

A defined-benefit pension fund, quite simply, promises to pay its beneficiaries a fixed benefit at a specified time. In the mid-twentieth century, this was the dominant form of retirement saving — thanks in large part to the struggles of unionized workers. A defined-contribution investment vehicle, by contrast, involves an individual contributing a fixed amount every month, but the amount they will receive in retirement depends upon market performance. In the “neoliberal era,” as unions have lost power, defined-contribution plans have become the most common form of retirement savings.

Public sector defined-benefit pension funds will receive particular emphasis in what follows because they are among the largest institutional investors — and, historically, the most influential actors in shaping the new finance capital.

It’s also worth noting what this story will not include: Social Security. As “pay-as-you-go” system, Social Security pays current retirees with revenue collected from current workers through taxes. In other words, today’s workforce finances today’s retirement security, with the expectation that future generations will do the same. This fully public, pay-as-you-go system exists entirely outside of the financial system and treats retirement security as a public good. Of course, Wall Street would love to see that change. Our goal, on the other hand, should be to dramatically expand it.

Some of the earliest modern institutional investors were pension systems established by local and state governments in the early twentieth century to provide retirement benefits to public employees — teachers, firefighters, police, and others. In certain cases, these public pension systems operated on a pay-as-you-go structure similar to that of Social Security.

In others, they invested the assets entrusted to them with the objective of achieving returns sufficient to make benefit payments over time. The appeal of this kind of “funding” structure — a theme that will recur in this account — was that it enabled political officials to limit the cost to taxpayers of benefits owed to retired public employees.

Initially, public pension systems invested almost exclusively in low-risk municipal, state, and federal bonds under strict regulatory constraints. By the end of World War II, roughly 90 percent of public pension fund investments consisted of such government bonds. (A bond is simply a type of loan for which the borrower makes recurring interest payments — determined by a specified “yield” — and, later, repays the principal in full).

In the mid-twentieth century, this investment model created a mutually beneficial arrangement between public pension systems and municipal governments. Pension systems received predictable annual returns, while government officials gained access to low-cost credit that could be used to fund public infrastructure projects, including schools, hospitals, and transportation systems. Historians Sean Vanatta and Michael Glass have aptly described this model of public pension investment “fiscal mutualism.”

Meanwhile, in the private sector, millions of workers won defined-benefit pension plans in the years after World War II thanks to the growth of industrial unions like the United Auto Workers and United Steelworkers. In 1949, the Supreme Court ruled that pension benefits were a mandatory subject of private sector collective bargaining, thus obligating employers to come to the table on the issue. By the mid-1950s — at the height of US labor movement membership — more than half of all private sector union members enjoyed pension coverage.

Many private sector unions hoped to use their pension systems in ways that mirrored the fiscal mutualist model adopted by their public sector counterparts. In other words, they sought to leverage these large pools of capital to advance the interests of workers — for instance, by investing in worker housing. As one might imagine, capitalists were not thrilled about this prospect. And as we will see, they took action to make sure it did not happen.

Now, back to public sector defined-benefit pensions. In the years following World War II, public pension systems began to depart from the fiscal mutualist model and expand their investments into private financial markets — above all, in corporate securities. The driving force behind this change can be summed up simply: the desire to achieve greater “yield” (industry parlance for returns, or gains, on investments).

Why the sudden urge to increase yield? First, for a variety of reasons, a growing disparity emerged between the yields offered by government bonds and those promised by corporate securities. If corporate securities carried greater risks, they also came with the possibility of higher returns — and this became more and more attractive with time.

Second, the postwar growth of the labor movement heightened investor concern about inflation. Many capitalists feared that union power would exert relentless upward pressure on wages and prices. To maintain — or increase — the real value of an investment, returns needed to keep pace with inflation. Whether rational or not, these inflation fears led to growing anxiety among pension system managers about the performance of their investments.

Third, the explosion of militancy among public sector workers during the 1960s — struggles closely connected to the civil rights movement — placed new pressure on public pension systems. Public employees, disproportionately women and people of color, demanded and won retirement security on par with that of private sector union members in industries like manufacturing.

Underlying all of this was a familiar political impulse: the preference among local and state officials to meet growing pension obligations without raising taxes.

Public pension system managers responded to these factors by overhauling their funds’ investment portfolios between the end of World War II and the mid-1970s. From the high point of the fiscal mutualist era in the mid-century, municipal and state bonds had virtually vanished from the holdings of these public systems by the time Richard Nixon left office. Taking their place were ever more corporate securities, making public pension systems among the biggest players in the stock market.

To emphasize the pressure public pension system directors faced to increase yield is only to tell half of the story. Throughout this period, an ascendant asset management industry furiously lobbied state governments to liberalize regulations on public pension investments and to entrust stewardship of these assets to professionally trained financial experts. Moreover, as the asset managers lobbied, they gained standing within trade groups that represented pension funds and public financial officials (such as state treasurers), which opened even more doors of influence. These firms and their allies in government understood all too well the historic opportunity before them — access to the growing pools of postwar US retirement savings promised enormous profits and power. Wall Street, in short, was a key player in this process.

A parallel process played out in the private sector. The capitalist class viewed the labor movement’s mid-century growth with alarm — including unions’ efforts to assert control over the uses of their pension funds’ assets. Thus, the conservative drafters of the anti-labor Taft-Hartley Act of 1947 added a provision requiring that the boards of collectively bargained private sector pension funds include representatives of management at least equal in number to those of labor. The point was to place a check on union influence over investment decisions.

In 1974, Congress went further by passing the Employee Retirement Income Security Act (ERISA). ERISA did three key things. First, it mandated that retirement assets be held in trust — that is, managed by a trustee on behalf of a beneficiary according to specified guidelines. Second, it imposed funding percentage requirements, setting rules for how much pension funds had to have on hand at any given time. And third, it implemented a restrictive fiduciary duty regime to govern the plans. The latter explicitly required that pension fund decision makers prioritize their “fiduciary responsibility” to the plan — basically, the growth of the fund’s assets — above all other concerns.

While ERISA applied only to private sector pension funds, state courts and legislatures increasingly applied those same principles to public pension systems. By this time, as we have seen, public pension systems had already largely moved away from pay-as-you-go and fiscal mutualist models and had “diversified” their portfolios to consist predominantly of corporate securities.

In both public and private pension systems, the new fiduciary requirements imposed by ERISA and its state-level counterparts accelerated the delegation of investment decision-making to professional asset management firms. But while the process gained steam from the 1970s onward, it is important to remember that its origins lay in an earlier transformation: the deepening integration of US retirement savings with profit-driven financial markets over the course of the postwar period.

In the aftermath of ERISA, pension funds and their asset management partners became active agents in what has been called the “shareholder revolution” — the period when institutional investors placed intensifying pressure on corporate boards to increase profitability and drive up share prices, regardless of the consequences for workers or society at large. The shareholder revolution was integral to the rise of “neoliberalism”: an era marked by anti-union offensives, public sector retrenchment, and accelerating international capital mobility, all of which contributed to the spectacular increase in economic inequality that has defined our times.

In this context, the share of workers covered by traditional defined-benefit pensions declined markedly. In their place emerged an assortment of individualized, defined-contribution investment vehicles — such as 401(k)s and IRAs. As seen in the chart below, these individualized investment vehicles accounted for nearly half of all US retirement assets by the turn of the century and currently account for about 67 percent of all retirement assets.

From the perspective of asset managers, however, it makes little difference whether retirement savings are pooled in traditional defined-benefit pensions or channeled through a 401(k). They are happy to manage both and have done so as the collective size of retirement assets across all vehicles has ballooned to $44 trillion.

It’s also worth noting that institutional investors’ search for yield, which began during the postwar decades, did not stop with the move into corporate equities. An additional aspect of the shareholder revolution was the emergence of so-called alternative asset managers. While the exact contours of this category are often disputed, it generally includes investments that fall outside of the scope of publicly traded equities and bonds. Typically included are private equity, venture capital, private debt, real assets (real estate, farmland, and timberland), infrastructure, and hedge funds (more a trading strategy than an asset class).

Most recently, the asset management industry has experienced tremendous growth in the years since the 2008 financial crisis. While the political-economic context in which Wall Street operates has changed in important ways over the past fifteen years, two key factors stand out in explaining the rise of the Big Three since 2008.

The first was the “monetary policy” adopted by the Federal Reserve. Established by Congress in 1913, the Federal Reserve is a hugely important and complex institution that influences credit conditions across the economy — essentially, interest rates — by buying and selling large quantities of bonds. Through this mechanism, it exercises power over the cost of borrowing for households, businesses, and the government.

After 2008 and again during the pandemic, the Federal Reserve took unprecedented steps to lower interest rates across the board. The hope was to stimulate lending so households could buy homes (and other stuff) and businesses could invest in ways that would create jobs.

On the one hand, this liberal monetary policy played a role in stabilizing some very shaky economic foundations. This was particularly important given that through the 2010s, the Republican-controlled Congress refused to spend money (via fiscal policy) to help put people back to work. On the other hand, the extended period of low interest rates pushed investors toward riskier assets, like corporate stocks and bonds and real estate. The resulting boom in the stock market and in real estate prices — contributing, for instance, to skyrocketing home prices — was in part a consequence of this monetary policy.

In this context of rising stock prices, the passive investment strategy pursued by asset managers made a lot of sense. Why try to pick winners and losers when one could simply ride the market’s overall upward momentum? Moreover, given that the Big Three are universal owners — holding shares in just about every publicly traded company — the stock market boom directly increased their assets under management (AUM).

The second post-2008 factor that contributed to the growth of the Big Three was the regulatory reform that followed the financial crisis — namely, the Dodd-Frank Act. This legislation imposed restrictions on the activities of the “systemically important financial institutions” (SIFIs), particularly, investment banks, that had been at the heart of the crash. Asset managers, however, were not included under the regulatory purview of Dodd-Frank. As a result, they were free to undertake a wide range of activities beyond the range of the new rules.

Together these dynamics turbocharged the trends already fueling the growth of the asset management industry before the 2008 crisis. Since 2022, however, the Federal Reserve has reversed its liberal monetary policy and increased interest rates in an effort to combat inflation. What this means for the asset management industry remains to be seen.

Another open question is how the Trump administration’s unpredictable behavior will affect the new finance capital. What kind of impact will tariffs and other restrictions on capital mobility have on global capitalism? What about a cruel and sadistic immigration policy? And how will shifting international sentiment toward the US government — and by extension the US dollar — reshape the financial order?

Then there’s the specter of inflation: What kind of monetary policy will the Federal Reserve adopt to deal with price increases that result from a reordered global economy? And what would this mean for investors who have enjoyed extraordinary wealth appreciation in part thanks to the monetary policy of the past?

These and other questions may be unanswerable for now. But one thing is clear: the asset management industry will remain a major center of power in global capitalism for at least the foreseeable future — one that Trump will have to confront in one way or another. For those of us hoping to see a different kind of capitalist transformation — one that serves the interest of working people and the planet — understanding where this new finance capital came from may help us think more strategically about where it could be heading.