Why Republican control of Congress hinges on nine big-money Senate races

GOP needs six seats to lock down both chambers — and sink Obama's agenda

By Michael BeckelemailDave Levinthalemail

Whether Republicans control both chambers of Congress during President Barack Obama’s final two years in office squarely depends on a handful of U.S. Senate races now entering their final phase.

So far in all Senate races, candidates, parties and other political power players have aired more than 428,000 television advertisements, including both primary and general election-focused ads, according to a Center for Public Integrity analysis of data provided by Kantar Media/CMAG, a media tracking service.
Together, the ads are worth an estimated $153 million — a figure that will only continue to balloon between now and the Nov. 4 election.

Candidates themselves are responsible for only about half of these ads. Nominally independent groups — such as super PACs and politically active nonprofits — are responsible for most of the rest.

While partisan primaries in part account for the messaging barrage, candidates and other political groups have aggressively pivoted toward the general election during summer months — traditionally a period of political calm before the post-Labor Day sprint toward Election Day.

To oust Democrats from power, the GOP must pick up six Senate seats in November.

Competitive races are under way in more than a dozen states, with the battlefield stretching from Alaska to Colorado to North Carolina.

Democratic candidates and their allies have aired more TV ads to date than their GOP rivals in Alaska, Arkansas, Colorado, Louisiana and North Carolina, according to data provided by Kantar Media/CMAG.

Republican candidates and their allies, meanwhile, have bankrolled more ads in Georgia, Iowa, Kentucky, Michigan and Montana.

Thanks to retirements of Democratic lawmakers in Montana, West Virginia and South Dakota, the GOP looks poised to pick up at least three seats.
Meanwhile, Democratic incumbents in Alaska, Arkansas, Colorado, Louisiana and North Carolina are bracing themselves against strong Republican challengers.

And hotly contested open seat races are also underway in Iowa and Michigan, where long-serving Democratic senators have also announced plans to retire.
Republicans are mostly playing offense, except in a few states — most notably, Georgia and Kentucky — where Democratic candidates are mounting well-financed bids.

Both Democrats and Republicans have big-money allies on their sides.
Among the five most active non-candidate spenders so far this cycle, three lean Republican and two are aligned with the Democrats.

The top-spending groups to aid Republicans have been Americans for Prosperity, the politically active nonprofit backed by conservative billionaires Charles and David Koch; Crossroads GPS, a nonprofit co-founded by GOP strategist Karl Rove; and the U.S. Chamber of Commerce, a nonprofit trade association.

On the left, the TV ad wars have been dominated by Senate Majority PAC, a super PAC, and Patriot Majority USA, a nonprofit led by a longtime ally of Senate Majority Leader Harry Reid, D-Nev.

So-called “dark money” abounds: Of these five groups, only the Senate Majority PAC must regularly disclose its donors to the Federal Election Commission. The rest must only reveal information about their funders if money is received for a particular ad campaign — something that rarely happens.

Remarkably, about two-thirds of these 428,000-plus ads have aired in just nine battleground states that will likely determine which party will control the upper chamber of Congress during the final two years of Obama’s presidency.

1) North Carolina

Democratic Sen. Kay Hagan is running for re-election against Republican state House Speaker Thom Tillis in North Carolina, where voters have not re-elected a Democratic senator since the 1960s.

Super PACs and politically active nonprofits have dominated the airwaves in North Carolina, with all non-candidate, non-party groups responsible for about 80 percent of the more than 40,700 ads that have aired, according to a Center for Public Integrity analysis of data from Kantar Media/CMAG.

Hagan’s campaign has repeatedly blasted the Koch brothers, who support conservative nonprofit Americans for Prosperity, for their involvement in the race.
But the top sponsor of ads in this contest? It’s Senate Majority PAC, a Democratic super PAC, which has produced more than 9,500 ads in the race.

That’s about 63 percent more ads than Americans for Prosperity, which has pummeled Hagan for her ties to Obama and her vote for the president’s health care law. Americans for Prosperity’s ads don’t overtly call for Hagan’s defeat, thereby allowing the group to avoid telling federal election regulators how much money its pumping into its messaging machine.

Kantar Media/CMAG estimates that Americans for Prosperity has spent at least $1.8 million on TV ads in the Tar Heel State. Other sources, in attempting to calculate the cost of TV ad buys, have put this figure much higher.

To compete in this environment, both candidates’ campaigns have raised millions. Hagan had raised nearly $17 million for her re-election campaign as of June 30, versus Tillis’ $4.8 million. Hagan ended June with about $8.7 million in the bank, while Tillis reported $1.5 million cash on hand.

Candidates, parties and other politically active groups have, through late August, spent about $2.66 per eligible voter on TV ads.
 

 

2) Arkansas

Incumbent Democratic Sen. Mark Pryor is fighting for a third term in a state shaded red — Mitt Romney won 60 percent of the vote in 2012. Six years ago, Republicans didn’t even field a challenger to Pryor, whose family is an institution in Arkansas politics. This election cycle, Pryor is being challenged by freshman Rep. Tom Cotton, an attorney who’s a veteran of the U.S. wars in Iraq and Afghanistan.

Both Pryor and Cotton have been prolific fundraisers.

Pryor raised nearly $9 million as of June 30, and he ended the month with about $4.1 million cash on hand. Cotton, meanwhile, raised about $7.1 million. He ended June with about $2.8 million in the bank.

Notably, through late August, Pryor’s campaign had aired more ads than any other group or the Cotton campaign, at about 5,600. The Koch-supported Americans for Prosperity ranked as the second-most frequent ad sponsor, at about 4,000, according to Kantar Media/CMAG.

In all, non-candidate, non-party groups have accounted for about 62 percent of the more than 31,300 ads that have aired in Arkansas, according to a Center for Public Integrity analysis of data from Kantar Media/CMAG.
 

 

3) Louisiana

Incumbent Democratic Sen. Mary Landrieu is facing a tough race for a fourth term, but Louisiana’s election rules don’t pit her against just one Republican opponent. In November, all U.S. Senate candidates run in a “jungle primary,” and if no one candidate secures 50 percent of the vote, then the top two vote-getters will face each other in a December runoff.

Republican Rep. Bill Cassidy is widely viewed as Landrieu’s main challenger, although retired Air Force Col. Rob Maness, another Republican, is also drawing some support from conservative voters.

Landrieu’s campaign had aired more than 13,700 TV ads as of late August, according to Kantar Media/CMAG. That represented about 40 percent of all 34,200 ads in the Senate race.

Non-candidate, non-party groups account for nearly half of all ads aired in Louisiana, with Americans for Prosperity earning the No. 1 spot, at about 4,900 ads.

As of Aug. 2, Landrieu had far outraised Cassidy: $14 million to $8.6 million. However, the Republican challenger reported slightly more cash on hand: $5.6 million versus $5.5 million.
 

 

4) Alaska

You wouldn’t necessarily know it by watching the TV ads, but Senate Majority PAC has been a major player in Alaska's U.S. Senate race. It has provided the bulk of the funds for another super PAC, called Put Alaska First, which supports incumbent Democratic Sen. Mark Begich.

Put Alaska First has aired about 6,400 TV ads, as of late August, according to Kantar Media/CMAG. That amounts to roughly one out of every five aired in the race. In all, non-candidate, non-party groups account for about 52 percent of the more than 33,400 ads aired in Alaska.

Meanwhile, Begich’s own campaign has aired more than 10,100 ads — about 30 percent of all ads.

Begich has also maintained a fundraising advantage over his Republican rival, Dan Sullivan, the state’s former attorney general and commissioner of the Department of Natural Resources.

As of July 30, Begich had raised about $8.4 million compared to Sullivan’s $4.1 million. The Democratic incumbent reported about $2.1 million cash on hand, at that time, while Sullivan reported about $990,000.

Through late August, no other Senate race has a higher rate of TV ad spending per eligible voter — an estimated $6.
 

 

5) Kentucky

No matter that Kentucky is a fairly rural state with only a few sizable media markets. Through late August, candidates and outside groups have aired about 37,500 TV ads in this monster Senate battle — with 70 percent from Republican candidates and GOP-aligned groups, including ads run during Senate Minority Leader Mitch McConnell’s primary against tea party challenger Matt Bevin.

McConnell would almost certainly become Senate Majority Leader if Republicans gain six Senate seats after the midterm elections, but he’s under withering attacks from Democrats, particularly his Democratic opponent, Secretary of State Alison Lundergan Grimes.

Grimes has already raised millions of dollars and received endorsements from the likes of Bill Clinton, though McConnell has an even bigger war chest — his $9.8 million in the bank as of late June compares to $6.2 million for Grimes.
Meanwhile, candidate-specific outside groups exist to support both McConnell and Grimes, and the pro-McConnell Kentucky Opportunity Coalition, a nonprofit, leads all others in total ads with more than 9,300. Other big groups — including the American Chemistry Council, U.S. Chamber of Commerce, Senate Majority PAC and Patriot Majority USA — have also been active in the contest.

The estimated spending through late August on TV ads from all sources per eligible voter is $3.64.
 

 

6) Michigan

The open seat Senate race in Michigan pits Democratic Rep. Gary Peters against former Secretary of State Terri Lynn Land, who has already pumped millions of dollars of her own money into her campaign. The Democratic-leaning state has already seen a deluge of ads from Koch-connected groups, including Americans for Prosperity and the Freedom Partners Chamber of Commerce.

Team Peters has fought back under the auspices of the Senate Majority PAC, as well as labor unions such as the American Federation of State, County and Municipal Employees and Service Employees International Union. A super PAC supporting Land — founded by retired businessman Paul Mitchell — has also entered the fray, as has a nonprofit called the American Sustainable Business Council Action Fund, which has praised Peters in ads for supporting the auto industry bailout.

Through late August, Michiganders have already watched more than 23,500 TV ads about this Senate race.

As of mid-July, Land's campaign had raised $8.7 million, while Peters' campaign had raised about $7 million.
 

 

7) Colorado

This race went from quiet to animated when Republican Rep. Cory Gardner announced in March that he would challenge incumbent Democratic Sen. Mark Udall, who was first elected in 2008. Recently, Colorado has leaned Democratic — Obama carried it in both 2008 and 2012. But Democratic state leaders have also recently faced ire from voters over a push for stricter gun control laws and education funding.

Already, conservative groups such as Americans for Prosperity and Crossroads GPS, a nonprofit co-founded by GOP strategist Karl Rove, have been working to lower Udall’s favorability rating, criticizing him for backing Obamacare, for instance. The U.S. Chamber of Commerce, meanwhile, has spent more than $1 million brightening Gardner’s image, according to FEC filings. Udall has been boosted by groups such as Senate Majority PAC, which FEC records show has invested more than $2.6 million into the race through late August, and the League of Conservation Voters.

At the end of June, Udall’s campaign committee enjoyed a $5.7 million-to-$3.4 million cash-on-hand advantage over Gardner.
 

 

8) Georgia

This open seat Senate race — incumbent GOP Sen. Saxby Chambliss is retiring — could be one of the nation’s closest, pitting two extremely well-funded candidates against one another.

The Democratic Party has rallied behind Michelle Nunn, CEO of the Points of Light Foundation and daughter of former Sen. Sam Nunn. Nunn has raised more than $9.2 million and still had $4.8 million in the bank as of late June.
Republicans, meanwhile, nominated self-funding businessman David Perdue over Rep. Jack Kingston in a July runoff vote. The primary is a major reason why more than 36,100 ads have already been aired in the race — Republican candidates and GOP-aligned groups account for about 78 percent of them.

Nunn’s own campaign, however, has aired more ads than Perdue’s campaign, which reported about $780,000 in the bank as of July 2.

Special note: if no candidate wins 50 percent of the vote in November — Libertarian Amanda Swafford could complicate matters if the vote is extremely close — the top two candidates have a runoff in January.
 

 

9) Iowa

Democratic Rep. Bruce Braley is running against Republican state Sen. Joni Ernst in this open seat race, where incumbent Democratic Sen. Tom Harkin is retiring. Ernst succeeded in uniting several factions of the GOP during the primary, and she gained nation attention for promising to make Washington “squeal” in one notable campaign ad that touted her background castrating hogs among her credentials for knowing how to “cut pork” in Congress.

About 31,500 ads from candidates, parties and other politically active groups have run so far in this Senate race, according to Kantar Media/CMAG, with conservatives accounting for 56 percent of them.

The top non-candidate spender in the race? The Concerned Veterans of America, a veterans-oriented group that is part of the Koch brothers’ political network, which has aired about 3,300 ads.

But as of late June, it was Braley’s campaign that had stockpiled more cash. The Democrat had raised $7.1 million and reported $2.7 million in the bank, while Ernst had raised $2.5 million, with $1.1 million cash on hand.
 

 

Best of the rest:

New Hampshire

Freshman Democratic Sen. Jeanne Shaheen will likely face former GOP Sen. Scott Brown, who briefly represented Massachusetts and has now gone north to the Granite State in a bid to reclaim his political fortune. He lost his office in 2012 to Democrat Elizabeth Warren.

Although Brown is expected to the Republican Party’s nominee next week, he nevertheless faces a pair of plucky challengers in one of the calendar’s latest primaries: New Hampshire’s former two-term U.S. Sen. Bob Smith and former state Sen. Jim Rubens, who’s so far received about $1.2 million in support from Mayday PAC, according to FEC filings. Mayday PAC is an anti-super PAC super PAC founded by Harvard Law School professor Lawrence Lessig.
 

 

Montana

Among all the issues that could affect a Senate race — the economy, energy, military conflicts — plagiarism isn’t typically among them. Except, that is, in Montana, where interim Democratic Sen. John Walsh quit the race in August amid accusations he lifted other people’s work in writing his master’s degree thesis.

Now, Amanda Curtis — a high school math teacher and Montana state representative with meager political resources — stands as Democrats’ emergency replacement against Republican Steve Daines. The Republican congressman’s campaign has already aired more than 10,100 ads in his bid to be the Silver State’s next senator. That’s nearly half of the 21,100 ads in the entire race.

So far, Curtis has received little outside support for what’s now an implausible bid to keep this Senate seat blue.

President Barack Obama Weekly Address August 30, 2014 (Video/Trascript )

President Barack Obama
Weekly Address
The White House
August 30, 2014

Hi, everybody.  Whether you’re firing up the grill, fired up for some college football, or filling up the car for one last summer roadtrip – Happy Labor Day weekend.

We set aside Labor Day to honor the working men and women of America.  And this Labor Day, we’ve got more to celebrate.  Over the past 53 months, our businesses have added nearly 10 million new jobs.  Last month, for the first time since 1997, we created more than 200,000 jobs for six straight months.  And for the first time in over a decade, business leaders worldwide have declared, two years running, that the number one place to invest isn’t China – it’s America.

So there are reasons to be optimistic about where we’re headed.  And the decisions we make now will determine whether or not we accelerate this progress – whether economic gains flow to a few at the top, or whether a growing economy fuels rising incomes and a thriving middle class.

Think about it this Labor Day.  The things we often take for granted – Social Security and Medicare, workplace safety laws and the right to organize for better pay and benefits, even weekends – we didn’t always have these things.  Workers and the unions who get their back had to fight for them.  And those fights built a stronger middle class.

To build a stronger middle class in today’s changing economy, we’ve got to keep fighting.  We’ve got to fight for the right to affordable health insurance for everybody.  The right to fair pay, family leave, and workplace flexibility.  The right to a fair living wage. 

Let me focus on that last one for a minute.  In America, no one who works full-time should ever have to raise a family in poverty.  A hard day’s work deserves a fair day’s pay.  And raising the minimum wage would be one of the best ways to give a boost to working families.  It would help around 28 million Americans from all walks of life pay the bills, provide for their kids, and spend that money at local businesses.  And that grows the economy for everyone.

The bottom line is, America deserves a raise.  But until we’ve got a Congress that cares about raising working folks’ wages, it’s up to the rest of us to make it happen.  And in the year and a half since I first asked Congress to raise the minimum wage, Americans of all walks of life are doing just that.

Thirteen states and D.C. have done their part by raising their minimum wages.  Four more states have minimum wage initiatives on the ballot this November.  And the states where the minimum wage has gone up this year have experienced higher job growth than the states that haven’t. 

Business leaders at companies like The Gap are doing their part.  They’re raising base wages for tens of thousands of workers because they know it’s good for business.

Mayors across the country are doing their part.  Mayor Emanuel in Chicago and Mayor Garcetti in L.A. are working to lift their cities’ wages over time to at least thirteen dollars an hour.

I’ve tried to do my part by requiring companies that get contracts with the federal government to pay their workers a fair wage of ten dollars and ten cents an hour. 

And earlier this month, the president of Kentucky State University set a great example by giving himself a $90,000 pay cut, so that he could give raises to his lowest-paid employees.  His sacrifice will give more of his workers and their families a little extra money to help make ends meet. 

That’s how America built the greatest middle class the world has ever known.  Not by making sure a fortunate few at the top are doing well, but by making sure that everyone who’s willing to work hard and play by the rules can get ahead.  That’s the bedrock this country is built on.  Hard work.  Responsibility.  

Sacrifice.  And looking out for one another as one united American family.

Let’s keep that in mind this Labor Day, and every day.  Have a great weekend, everybody.

Obama's miscalculation

Marwan Bishara

Source: Al Jazeera

And the greater lesson from the Middle East.

President Barack Obama, who by any measure is a smart and shrewd politician, must be feeling rather foolish nowadays. Not only have his predictions proved wrong about Iraq and al-Qaeda, but, under his watch, America is also being drawn back into the Iraq quagmire three years after it withdrew.

The president was all optimistic when he secured US withdrawal from Iraq in 2011. But his claim of "extraordinary achievement", of leaving behind a "sovereign, stable and self-reliant Iraq", was soon shown to be, at best, wishful thinking - indeed a grave error.

Despite retaining eyes and ears on the Iraqi ground, the advance of the Islamic State group, over the last few months has clearly taken Washington by surprise. It's yet another terrible failure of US intelligence services.

How much of this can be said to be Obama's fault? Of course, he cannot be blamed for the follies of his predecessor, nor is he responsible for half a century of foreign policy that compromised America's values in favour of its short-term interests.

Still, the president does share major responsibility for the present failures after serving five years in office.

Obama might be careful, calculating and nuanced, but his foreign policy has produced one blowback after another from Libya to Afghanistan through Iraq and Syria.

Obama's mistakes

Miscalculation and myopia have seemingly marked the execution of the Obama doctrine of leading from far and behind.

Four major miscalculations stand out:

Inside Story - Islamic State 'beheading': A challenge to US?

First, the president rightly promised to "end the mindset" that produced the Iraq catastrophe, but instead he only reformatted it. He played it safe, not wise, staying below the radar by using, for example, remotely run drones instead of foot soldiers on the ground. Every attack has sown death and produced new recruits for the jihadi groups. Just ask the Afghans, Pakistanis and Yemenis.

In effect, President Obama wasted a historic mandate granted by the American people to "un-Bush" America's foreign policy by ending the hawkish unilateral militarism.

Second, Obama was right to downsize US regional commitments and lower regional expectations, but he did not help bring about multilateral alternative to US influence.

Obama lectured US allies and global powers about why they need to a play greater role in regional affairs, while preserving the US military and strategic dominance in the Middle East. In other words, as Washington projects overwhelming power from the Mediterranean to the Gulf - but forgoes its strategic commitments there - expect more not less trouble in the explosive region.

In that way the fragmentation of Iraq that started with the US invasion in 2003, has only escalated with US withdrawal in 2011. The same goes for the likes of Syria, Lebanon, Yemen, Libya etc.

Third, President Obama might have succeeded in tracing and killing Osama Bin Laden, but he has grossly underestimated the consequences of further decentralisation of al-Qaeda Central that Bin Laden once commanded on the borders of Afghanistan/Pakistan.

Only a few months ago, the president offered a blithe basketball analogy in response to questions about the rise and proliferation of jihadi groups affiliated with al-Qaeda: "If a JV team puts on Lakers uniforms that doesn't make them Kobe Bryant."

Alas, the Islamic State group has proved more powerful, more strategic and even deadlier than al-Qaeda Central, with far reaching ramifications for the US and its allies. Its leader, Al-Abu Bakr al-Baghdadi, has outperformed Bin Laden and has become a rallying symbol for many al-Qaeda affiliates throughout the region.

Lastly, the Obama administration has misjudged the tenacity of its nemeses, just as it underestimated the dependency of its regional allies on its protection.

Obama's attempts to remove the White House, albeit partially, from the region's disputes, has left behind more than just a major strategic void. These are the conditions for a perfect storm, the eye of which is the void left by the US.

For example, the Obama administration remained conspicuously silent as Prime Minister Nouri al-Maliki cracked down on his Sunni rivals, alienated the Kurds and undermined the unity of the country. This was made easier when the US media largely abandoned the country in an attempt at collective amnesia about the scars of the war.

The same goes for Syria. When Bashar Assad's regime was challenged by a popular revolt in 2011, Washington's allies looked to the US to intervene, preventing Assad from carrying out genocide against his own people, given that no other power had the capacity to do so. And of course the same goes for Washington's continued support for the Netanyahu government, as it expanded illegal settlements in Palestine and carried out a horrific offensive against Gaza.

The greater lesson

The lesson from all of these mishaps can be found, partly, in President Obama's own admission regarding Libya. In a recent interview with the New York Times, the president acknowledged that it was a mistake not to follow the war to dislodge Qaddafi with a real multilateral effort to stabilise the country and secure its unity.

Not so different from former Secretary of State Colin Powell's advice: if you break it, you own it.

Islamic Group claims control of Raqqa province

More importantly, removing the lid on any sort of hegemony, be it a dictatorship like Saddam's, a terrorist organisation like Bin Laden's, or even a superpower power like the US, can only open a can of worms, if it is not contained through the establishment in its place of a viable alternative power system.
Once the can has been opened, it's been proven impossible to close. Removing Saddam Hussein opened the gates of sectarian hell in Iraq. Assassinating Bin Laden empowered new jihadist leaders to step in to take up the mantle of al-Qaeda.

Whether evil or benevolent, a superpower is also a system of patronage with many stakeholders dependent upon it. Failure to change, meet or manage their expectations is sure to make US' clients pricklier, less secure, and, as a consequence, less cooperative.

For all these reasons, the US must ensure a viable multilateral alternative to its hegemony in the Middle East. It must use its super-power status to empower allies and regional players to assume greater authority. Europe and the countries of the region should be invited to take part and emboldened to step up to the plate if there's a genuine attempt at extracting the US from the Middle East's challenges.

US deniability over its hegemony in the Middle East would've been terribly amusing if it weren't terribly tragic. It's bad enough to behave like an empire in the 21st century, but to act irresponsibly is far worse.

President Barack Obama Weekly Address August 23, 2014 (Video/Trascript )

President Barack Obama

Weekly Address

The White House

Saturday, August 23, 2014 

Hi, everybody. Nearly six years after the worst financial crisis of our lifetimes, our businesses have added nearly 10 million new jobs over the past 53 months. That’s the longest streak of private-sector job creation in our history. And we’re in a six-month streak with our economy creating at least 200,000 new jobs each month -- the first time that’s happened since 1997.

Thanks to the decisions we made to rescue and rebuild our economy, and your hard work and resilience, America is leading again. Areas like manufacturing, energy, technology, and autos are all booming. And here’s the thing: we’re selling more goods Made in America to the rest of the world than ever before. American exports are at an all-time high.

Over the past five years, we’ve worked hard to open new markets for our businesses, and to help them compete on a level playing field in those markets. And we’ve broken records for exports four years running. Last year, our exports supported more than 11 million American jobs – about 1.6 million more than when I took office. They’re good jobs that typically pay about 15% more than the national average. And more small businesses are selling their goods abroad than ever before -- nearly 300,000 last year alone.

We should be doing everything we can to accelerate this progress, not stall it.
One place to start is by supporting something called the U.S. Export-Import Bank. Its sole mission is to create American jobs. That’s it. It helps many American entrepreneurs take that next step and take their small business global. But next month, its charter will expire -- unless Members of Congress do their job and reauthorize it.

Now, past Congresses have done this 16 times, always with support from both parties. Republican and Democratic Presidents have supported the bank, too.

This time around shouldn’t be any different. Because the bank works. It’s independent. It pays for itself. But if Congress fails to act, thousands of businesses, large and small, that sell their products abroad will take a completely unnecessary hit.

Small business owners have had to overcome a lot these past several years. We all saw local businesses close their doors during the crisis. And in the past few years, we’ve seen more and more open their doors and do their part to help lead America’s comeback. At the very least, they deserve a Congress that doesn’t stand in the way of their success.

Your members of Congress are home this month. If you’re a small business owner or employee of a large business that depends on financing to tackle new markets and create new jobs, tell them to quit treating your business like it’s expendable, and start treating it for what it is: vital to America’s success. Tell them to do their jobs -- keep America’s exports growing, and keep America’s recovery going.

Thanks, and have a great weekend.

Robert Reich: American democracy is diseased

 

This originally appeared on Robert Reich's blog. 

 

Americans are sick of politics. Only 13 percent approve of the job Congress is doing, a near record low. The President’s approval ratings are also in the basement.

A large portion of the public doesn’t even bother voting. Only 57.5 percent of eligible voters cast their ballots in the 2012 presidential election.
Put simply, most Americans feel powerless, and assume the political game is fixed. So why bother?

A new study scheduled to be published in this fall by Princeton’s Martin Gilens and Northwestern University’s Benjamin Page confirms our worst suspicions.
Gilens and Page analyzed 1,799 policy issues in detail, determining the relative influence on them of economic elites, business groups, mass-based interest groups, and average citizens.

Their conclusion: “The preferences of the average American appear to have only a miniscule, near-zero, statistically non-significant impact upon public policy.”
Instead, lawmakers respond to the policy demands of wealthy individuals and monied business interests – those with the most lobbying prowess and deepest pockets to bankroll campaigns.

Before you’re tempted to say “duh,” wait a moment. Gilens’ and Page’s data come from the period 1981 to 2002. This was before the Supreme Court opened the floodgates to big money in “Citizens United,” prior to SuperPACs, and before the Wall Street bailout.

So it’s likely to be even worse now.

But did the average citizen ever have much power? The eminent journalist and commentator Walter Lippman argued in his 1922 book “Public Opinion” that the broad public didn’t know or care about public policy. Its consent was “manufactured” by an elite that manipulated it. “It is no longer possible … to believe in the original dogma of democracy,” Lippman concluded.

Yet American democracy seemed robust compared to other nations that in the first half of the twentieth century succumbed to communism or totalitarianism.
Political scientists after World War II hypothesized that even though the voices of individual Americans counted for little, most people belonged to a variety of interest groups and membership organizations – clubs, associations, political parties, unions – to which politicians were responsive.

“Interest-group pluralism,” as it was called, thereby channeled the views of individual citizens, and made American democracy function.


What’s more, the political power of big corporations and Wall Street was offset by the power of labor unions, farm cooperatives, retailers, and smaller banks.

Economist John Kenneth Galbraith approvingly dubbed it “countervailing power.” These alternative power centers ensured that America’s vast middle and working classes received a significant share of the gains from economic growth.

Starting in 1980, something profoundly changed. It wasn’t just that big corporations and wealthy individuals became more politically potent, as Gilens and Page document. It was also that other interest groups began to wither.

Grass-roots membership organizations shrank because Americans had less time for them. As wages stagnated, most people had to devote more time to work in order to makes ends meet. That included the time of wives and mothers who began streaming into the paid workforce to prop up family incomes.

At the same time, union membership plunged because corporations began sending jobs abroad and fighting attempts to unionize. (Ronald Reagan helped legitimized these moves when he fired striking air traffic controllers.)

Other centers of countervailing power – retailers, farm cooperatives, and local and regional banks – also lost ground to national discount chains, big agribusiness, and Wall Street. Deregulation sealed their fates.

Meanwhile, political parties stopped representing the views of most constituents. As the costs of campaigns escalated, parties morphing from state and local membership organizations into national fund-raising machines.

We entered a vicious cycle in which political power became more concentrated in monied interests that used the power to their advantage – getting tax cuts, expanding tax loopholes, benefiting from corporate welfare and free-trade agreements, slicing safety nets, enacting anti-union legislation, and reducing public investments.

These moves further concentrated economic gains at the top, while leaving out most of the rest of America.

No wonder Americans feel powerless. No surprise we’re sick of politics, and many of us aren’t even voting.

But if we give up on politics, we’re done for. Powerlessness is a self-fulfilling prophesy.

The only way back toward a democracy and economy that work for the majority is for most of us to get politically active once again, becoming organized and mobilized.

We have to establish a new countervailing power.

The monied interests are doing what they do best – making money. The rest of us need to do what we can do best – use our voices, our vigor, and our votes.

Robert Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written 13 books, including his latest best-seller, “Aftershock: The Next Economy and America’s Future;” “The Work of Nations,” which has been translated into 22 languages; and his newest, an e-book, “Beyond Outrage.” His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His new movie "Inequality for All" is in Theaters. His widely-read blog can be found at www.robertreich.org.

Teresa Ghilarducci: Why the 401(k) is a “Failed Experiment”

Source: PBS

Teresa Ghilarducci is director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research. The 401(k) system has been a “failed experiment” for middle-class Americans because it was never designed with them in mind, she told FRONTLINE. “It’s not the fault of people that they don’t have enough savings in their individual retirement account or their 401(k)s,” she said. “It’s the fault of the system, and the whole system needs to be reformed.” This is the edited transcript of an interview conducted Oct. 25, 2012.

I’m going to take you all the way back to 1974. What was the significance of ERISA passing?

ERISA, the Employee Retirement Income Security Act of 1974, was passed after many people lost their pensions after many years of work, and they were promised pensions, but the company went bankrupt, and there wasn’t actually any funds to back up the promise.

The most famous case of that was Studebaker, that was based in South Bend, Ind. And that city [was] filled with people who for 20 years had been promised a pension, and they found themselves in their late 50s without a job or any income.

ERISA was passed to make companies set aside money to back up to promises. And a lot of the bigger companies were doing it anyway, so it codified, or made legal, what the big companies thought [was] the responsible thing to do.

And it was also a time when companies, to be successful, provided pensions, because they realized that turnover costs were really high, that after you trained workers and they left for another firm, it just affected their bottom line. …

So ERISA rode that wave of employer-employee relationships that really valued skilled workers and some loyalty to the job.

And how did that get reversed?

It wasn’t because the need for skilled workers or less turnover got reversed. … What’s happening is that [employers] are shedding older workers. At 50 to 55, there’s been a huge change in the connection between an employer and an older worker. Now, the reason why this … affects pension plans is because that change in employee relationships [has] come about with the same change of the design of the pension plan.

So we’ve seen in the 1980s and ’90s a shift away from a regular traditional pension plan to something called a 401(k)-type plan. Most call it a defined contribution plan, but most defined contribution plans are 401(k)-type plans. These plans were put into place at the beginning of the 1980s, and it was really meant to serve the needs of executives in a company that already provided pension plans for everybody else.

“The 401(k) … is one of the only products that Americans buy that they don’t know the price of it. It’s also one of the products that Americans buy that they don’t even know its quality or know how to judge its quality. It’s one of the products that Americans buy that they don’t know its danger.”

The plea from larger corporations to the Internal Revenue Service was: “Please give us a way to let our higher-paid employees save on top of the traditional plan for their retirement. Let us deduct their pay, tax-free, and let them pay taxes later after the accumulation.”

So the IRS thought, well, they’ll never do it if we allow them to do it, but make that available to all the workers. And the IRS was a little surprised that in fact, company after company started to adopt these 401(k) plans as a supplement to regular pensions.

When workers lost bargaining power because of international trade, because of the decline in unions, that supplement became a primary plan.

But … the biggest trend is not that these traditional plans are moving to defined contribution plans or 401(k) plans. The biggest trend we’re picking up is that employers are not providing any way for Americans to save for their retirement. So on top of the shift away from traditional plans to 401(k)’s is actually a [lesser] probability that a firm will even have a retirement account at work.

… Kind of unpack the irony that 401(k)’s were a way to make rich people richer.

So the end of the 1970s and early ’80s was a period of a lot of economic turmoil, but the relationship of the employer and the employee hadn’t changed much. … All employers cared about the loyalty of all their workers and wanted to help out their higher-paid managers. They decided to petition the IRS to actually expand their pension offerings, and they provided 401(k)’s as a supplement to the traditional plans.

What’s ironic is that as time progressed and regular workers had less bargaining power, less presence in the modern firm, is that this plan that was really built to supplement the retirement accounts for the higher-paid workers became the only vehicle in which lower-paid workers could save for their retirement.

So the structure was always set up against lower-paid or middle-class workers from the very beginning, because it was never intended to be the primary savings vehicles for most Americans.

How was it popularized?

The 401(k) plan was never organically popular among workers. The fact that workers were faced with decisions about where to invest — they were told that they had to choose how much they had to save for their retirement in order to be comfortable — was never anything that was a superior option to just a regular pension plan. …

But it became popularized with lots of advertising money and a lot of congressional protection that other kinds of financial products and other kinds of products in general didn’t have.

For instance, the 401(k) manager, or mutual fund, is one of the only products that Americans buy that they don’t know the price of it. It’s also one of the products that Americans buy that they don’t even know its quality or know how to judge its quality. It’s one of the products that Americans buy that they don’t know its danger, and it’s because the mutual fund industry had been able to protect themselves against regulation that would expose the danger and price of their products.

… How is it possible that our retirement funds, there’s so little transparency?

… The period of the 1980s and ’90s was a period in which there were high rates of return, or consistent rates of return in the product. So there was a complicity of belief that the mutual fund industry was regulated by the Securities and Exchange Commission or some other agencies that would just make sure that companies did the right thing and that the market competition would regulate itself.

So there was some faith in the product. It hadn’t blown up yet. People liked the [Ford] Pinto until the engines blew up. So it’s a matter of complacency. 401(k)’s were new products, and they were working well for a while. …

One of the worst aspects of the 401(k) industry is the conflict of interest. … So the 401(k) industry took fees from customers, paid lobbyists to go to Congress to say:
“You don’t need fee transparency. People won’t really understand it. Let the market thrive, and then through competition, the fees will just be appropriately priced.”

And so that was the story year after year when the Congress tried to expose the fees. …

… We all know that banks spend money on lobbying. But was it different than the usual sort of Wall Street kind of shenanigans?

I think that the rest of Wall Street and the rest of banks were more highly regulated because there was a popular movement against credit cards and against mortgages. …

Even the people who worked in the banks just accepted that they had to reveal what the real checking account fees were and what the real interest rate fees [were]. So there was a culture of regulation among commercial banks. …

The 401(k) industry comes from a different side of Wall Street and a different side of the banking industry. Those were products that used to be available only to the very rich. And they made a deal. Those mutual funds made a deal with Congress, just like hedge funds are now, that look, it’s sophisticated consumers that buy our products, and therefore they can understand what the fees are. If you regulate us, all you will do [is] create red tape and take money away from customers. …

Do you remember the first time you heard the term 401(k) and what you thought about it?

USA Today in the early ’90s asked me what I thought about the this new forum of defined contribution plans, and they asked me because I was a new professor and had just finished a huge study of 800 firms and how much money they put aside for their employees.

I had just written a book on how Americans prepare for their retirement, and I knew that Americans really prepared for retirement by paying taxes into Social Security and also saving at work. And I had just finished a study that showed that if employers adopted a 401(k) plan, this new kind of plan, that they actually lowered their pension costs. …

And I wondered what this new forum was. So the early ’90s, I just told the news media and everybody about the fact that these 401(k) vehicles seemed to be a way that companies just got out of contributing to their workers’ savings plans. …

And yet they became very popular among workers. …

So when workers were offered a 401(k) plan and their defined benefit plan was frozen or eliminated, workers did say they liked it. But it wasn’t because it was their first [choice]; it was because [it was] their only choice.

All of us, when we’re faced with something rather than nothing, tend to be optimistic about how that something is going to work. Study after study that asks workers, “Would you prefer a secure retirement plan, or do you prefer a plan where you can decide where to invest, and how much to save?,” workers choose the more traditional plan.

They like the supplement; they like the choice. But it doesn’t mean they refused a secure retirement plan.

But the markets were booming. It was exciting. We were all sort of gambling on the market, and suddenly we could gamble with our retirement money.

… The stock market was all over the news media. Personal finance journalists all of a sudden were in high demand. There are lots of people on the radio that have personal finance programs. You had [Jim] Cramer and the Motley Fool making investment almost kind of fun and childlike. Cramer reminds me of Sesame Street, you know, running around and honking horns and talking to people about big adult stuff.

All of a sudden, workers were getting some familiarity, like you do when you are exposed to a lot of advertising, with terms that were really in another rarefied world of finance, so that everybody on the street could talk about [large] cap and NASDAQ and the Dow as if it were part of their life.

So the 401(k)’s actually exposed consumers to a whole other world of finance, and the market was in a long-term bubble. It was actually growing.

Now people couldn’t see what their accounts were actually doing. That was hidden from view. And in fact, there were lots of articles in that period of time which would survey workers. How much did you earn in your own account? And even very highly educated workers would name a number that actually incorporated their own contributions. So many sophisticated workers — these are engineers; these are highly educated workers — could not separate out the earnings in their accounts, the actual earnings from the stock market from actually the money that they themselves put in. …

[It] would only take a huge financial crisis, like the one we had in 2008, 2009 for people to realize that that account was at risk. And so the industry was able to coast on some satisfaction among the consumers, the workers who were putting money into it, and their employers who thought, “Well, if my employees aren’t complaining, I guess it’s OK.”

And they were able to lobby Congress to say: “Look, if it ain’t broke, don’t fix it. Don’t saddle us with regulation.”

… Talk about the growth of the mutual fund industry. What role was Fidelity playing in making 401(k)’s popular?

In the 1970s, ’80s and ’90s, we were in … a period of time when the labor force was aging rapidly. … The mutual fund industry was not very well regulated, and they were finding that people were moving into their savings years. A 40-year-old saves more than a 30-year-old, and a 50-year-old saves even more than a 40-year-old. So they were just taking in money hand over fist, and they loved it.

As demand was increasing in their industry, it let them play with it more, offer more financial innovation. So programs in colleges, at MBA schools really ignored engineering, really ignored management, and it was the finance programs that were exploding.

The big investment houses worried less about whether or not the steel company they were investing in had good operations, and they were just interested in creating more financial products. So we had more financial engineering in the 1970s and ’80s, more product innovation than we had actual engineering.

But this product innovation, this money flowing into the mutual fund industry because the workforce was getting older, was a way for them not only to create more high-value, high-profit products, but it was also a way for them to consolidate their political power. …

So who were the early players? And how did they get so big?

The early players were Fidelity, MFS — Massachusetts Financial Services — were the early creators of 401(k)’s. … The early mutual fund companies really were marketing to the very richest Americans. These were Americans that had wealth beyond their house and beyond their company plan.

And all they did was have this financial product that let rich Americans not have to pick on their own which stocks to buy but said, “Hey, we’ll give you a fund that has a little bit of everything, and then we’ll do a lot of that stock picking for you.”
And rich people thought that was a good use of their time and a good use of their money. They would pay a mutual fund manager to pick the stocks, and they would just get a rate of return from a diversified portfolio. So the mutual fund industry was an industry for older rich people. …

When one has a 401(k), you generally have this sort of Chinese menu of really fabulous-sounding options. … Can you give me a sense of what those products are and who makes money off of them?

… The people who have gotten a job and are asked to invest in their 401(k) are handed really two choices: How much do you want to put into your 401(k), and where do you want to put that money? And they’re given a menu of choices about where to put their money. …

We experts have actually analyzed the choices that people make. So one disturbing fact is that if people have 15 choices, they feel the most prudent thing to do would be to diversify their contributions — it makes actually a lot of sense — and they just put 1/15 of their contributions into all their funds. Or they’ll ask their co-worker, “So, buddy, what did you put your money in?” Or they just may be in a good mood to put their money toward things that sound like growth, or they may be in a mood to put things in that more sound like value.

There’s really no guidance that employers provide, and that makes sense, because if employers provided guidance, they’d be on the hook if they provided the wrong guidance.

So workers are really left on their own to choose among the Chinese menu, and because there’s no regulation, there’s often not a distinction about whether or not they’re even investing in a stock or a bond. And there’s nothing on that Chinese menu that reveals the price of that product.

So when they put their money in [these] “value” and “special” and “growth” funds, what happens to that pile of money?

So we know that 401(k) participants don’t invest like a professional would invest. They don’t invest in an appropriately diversified portfolio. They don’t invest in the lowest fee portfolios. …

Just asking the question, have 401(k) investors done as well as professional investors, done as well as defined benefit investors, or have done [as] well if they had put their money under their mattress, and the sad fact is that 401(k) investors perform the worst among all participants.

Here’s a fun fact. For many people who just put their money into a 401(k) and never looked at it again, and happened to have picked a low-fee diversified mutual fund, [they] would have done a lot better than the [401(k)] investor that watched the stock trading shows or followed the investment advice and responsibly tried to trade every quarter or every year, because the person who tried to be responsible and follow the advice on the news media or in a pamphlet would actually pay such high trading costs that it would take away from their returns.

So we know after 30 years of this 401(k) experiment that people do worse in 401(k) than they would have if their money was in a traditional plan or if it was in a plain vanilla retirement account.

Why do most people not know that?

Most people don’t know that the 401(k) products are toxic and their behavior toward a 401(k) product is toxic because no one has been responsible for providing a safe product.

The Congress has not put itself [out] as a responsible actor. Employers were told, “It’s up to your employees to choose,” and the banking industry and the mutual fund industry said, “Trust us.” …

So the reason why workers don’t know that their 401(k) products and the choices that they make won’t yield them enough return and that they’re paying high prices is because the products are dangerous, and nobody regulates them.

It almost sounds like … the mutual funds are mugging widows and grandparents, you know?

The mutual fund industry [is] doing what they’re supposed to do. They’re supposed to make money for their shareholders, so they’re providing a product to not just widows and our grandparents and older people, but they’re providing a product to workers. And the workers are responsible to find out the quality of that product.

There’s very little regulation, very little information about those mutual funds, and the mutual fund industry likes it that way, because the less information they have, the higher the fees they can charge. …

… In this world of [the Charles Schwab ad campaign] “Talk to Chuck” and Fidelity and T. Rowe Price and Prudential, who should I trust?

… In the 1950s and ’60s and ’70s, most Americans dealt with the bank because the bank gave them a mortgage; the bank gave them a savings account or a checking account. The bank might have given them a small business loan. And the banks started giving you credit cards.

At the time that the commercial banks provided these products, Congress kept up with them and regulated them. It wasn’t without some tension, but the American worker and the banking industry had a well-regulated, familiar relationship.

In the 1980s and ’90s, the part of Wall Street that really only interacted with rich people stepped down and expanded their market to the middle class and to ordinary workers, and they were able to expand their high-end business down-market because employers were shedding their traditional plans and providing a do-it-yourself pension plan.

“Most people don’t know that the 401(k) products are toxic and their behavior toward a 401(k) product is toxic because no one has been responsible for providing a safe product.”

So the changes at the workplace really matched up with changes in the mutual fund industry to expand their market. So the mutual industry started to sell a product that wasn’t appropriate for most Americans, and the players there became household names because they went retail. And the advertising budgets of these firms exploded, and they got those advertising budgets from fees that were named education fees or marketing fees or administrative fees.

And so a big part of the advertising industry in this country [has] moved away from cars and clothes and diamonds and [has] moved toward mutual fund products. There’s always been an effort of sort of luxury-good providers to make sure that the middle class would kind of grasp and reach, and kind of get those products. I think the mutual fund industry is just part of that down-marketing of a luxury good.

The problem is, it’s not just a frill. The problem is that the mutual fund industry has replaced products that all Americans need, which is a secure way to save [for] your retirement in an efficient way.

Is there a campaign that you think was more memorable than any other?

… The campaign that I thought was going to be the most effective … was the “Talk to Chuck” campaign. It was talking directly to younger people and to workers to say: “I am going to help you through this process. Just talk to somebody that could be your uncle or your dad,” or actually the local banker that used to tell you: “Hey, buddy, you really can’t afford that home. Go a little bit cheaper; we’ll put 20 percent down.”

So the “Talk to Chuck” was a campaign that referred to a world in which you could actually have a partner and a trusted adviser for your financial products, just like you had a trusted teacher that helped you through your education or through your career.

It was a campaign I thought would really take off, and it looks like it has. So I’ve seen that the mutual fund industry has kind of changed their tactics and are really locking into not the dreams of retirement, but to the anxieties of retirement. And they’re hoping that the worried worker will actually trust an adviser.

So I think it’s working for the industry, but it’s not working for the American public. Many people that I know are paying way too much to their adviser to buy products that are way too expensive for them.

And so we have a system in which in order to be responsible, you’re supposed to hire your own adviser, when in the past it was just all you had was a way for you to take your hard-earned money, maybe 5 percent, 10 percent, set it aside, and you knew that you would actually have a stream of income for the rest of your life.

Let’s talk about … the financial adviser that a lot of people get. Who is this person? How qualified are they generally? What are their conflicts of interest and their fiduciary responsibility over the advice they give you?

Many middle-class workers are consuming a product that was once only a product that very rich people bought, and that was a personal adviser. The big difference is that the rich people would hire a financial adviser that had just a very high fee and knew a lot about taxes and estate planning. Now middle-class workers are getting a product where the adviser is really just a broker or a salesman, so it looks like the kind of product that rich people have, but it’s a very different product.

So when you hire a guy, or you have a financial broker, that guy is most often attached to a big financial company. Many people are getting their financial advice from an American Express adviser. They’re getting their advice from somebody who they find in a small room at their local bank, who are selling products for their individual retirement account. Or they’re talking to a financial adviser that’s connected to Charles Schwab or Fidelity or another mutual fund aggregator. And this guy works for that financial company, just like the person who sold you a car works for the dealer or for the auto industry.

Now that guy — and often it’s a gal — does have some professional standards they have to meet. They have to pass a couple of licenses, and they have to know something about you — not very much about you, but they want to know if you’re a high-risk investor or you want a secure amount of money, and they probe you a little bit.

There’s always the standard questions. Do you want to preserve your capital, or do you want to make as much as possible? And based on those questions, they have some rough standards about what kinds of products to put you in. But after that, everything they tell you is really not regulated.

They have a professional standard to their profession, and they have a loyalty standard to the company. They have to make as much money as possible for their company, and their company rewards for selling you the most high-priced, high-profitable standards.

Let me contrast that guy with the guy, the investor that people have in a traditional plan. … When you put a dollar into an ERISA plan or [in]to a traditional plan, that money was protected by a standard called the fiduciary standard. That standard requires everybody running your money to be professionals but also to have loyalty only to you, to the beneficiary. …

They can’t put a penny toward an investment that might benefit somebody else or take that benefit into consideration. Even if that investment would save the auto company or the steel company, the investor, the professional has to say, “Does it help my worker or my retiree?”

A professional standard that your guy is guided by is a much lower standard than a duty of loyalty or fiduciary standard. Basically your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund. And they try to sell you the most profitable products. …

… So they’re the broker-dealer?

They’re the broker-dealers. They’re the financial adviser. … There’s no difference, but they certainly don’t present themselves to you as a broker-dealer. That’s the function they serve in the industry.

But you as a worker, or you as a saver in an individual retirement account, you’re presented with this guy. In another name, he calls himself, or she calls herself, an adviser. Many people in the industry think that we’re going to see a wave of lawsuits against these advisers for even violating their low-level professional standards, because these advisers have only been pushing high-fee products. And as people find out that there’s really not enough in their nest egg, they’re going to have notes. They’re going to have records of the kinds of advice that they were given, and we probably will see a lot of lawsuits to actually push the boundaries of what professional standards mean.

… The Pension Protection Act [of 2006]: Why was this passed, and did it make things better or worse?

The Pension Protection Act is a lovely sounding name of a law, but it in fact did the opposite of what the name implies. The Pension Protection Act really put the final nail in the coffin of defined benefit plans.

The Pension Protection Act continued the severe and tight regulation of the traditional pension system and gave a lot of leniency to the IRA and to the 401(k) industry. So it continued the asymmetry of regulation.

And what it did was tell defined benefit plans that they had to fund their promises to a much higher degree than they ever had before. It accelerated the payments into the pension plan.

Now, that all sounds good, but the Pension Protection Act did to traditional plans what a law that would say, “Hey, you might have a 30-year mortgage; you now have to fund your mortgage in five years,” would do to homeowners.

What it did was accelerate the full funding of many plans, and it forced a lot of plans to terminate, to go bankrupt, because they weren’t planning on funding their plans to such a high degree, just like somebody who took out a 30-year mortgage would not be able to fund it all in just five years. …

… Why weren’t they regulating where the problem was, which was 401(k)s? Why not have any provision that would protect people that were putting their money in these?

The Pension Protection Act focused its attention on traditional plans but did not focus its attention [on] the defined contribution world of individual retirement accounts and 401(k) accounts, because the lobbyists for the 401(k) industry was very powerful, and the lobbyists for the traditional pension plans were not as powerful. …

Who’s the lobby?

The lobby for the 401(k) industry is the Investment Company Institute of America. They are called the ICI, and they are growing in Washington, and they are very well funded because their clients were growing and were taking in money from an aging population.

Skip ahead two years later. I believe you testified before a committee. … Talk to me about that day. What happened in that room?

I testified in Congress in October in 2008. If people remember that period of time, the month before Lehman Brothers had just gone bankrupt, and we had the biggest slide in the financial markets in a couple of decades. And we were just collecting data on what happened to people’s 401(k) accounts, and those accounts fell by a trillion dollars.

Everybody overnight who had a 401(k) or an IRA saw their accounts drop by 25 percent on average. But many people saw their accounts drop by half. The 401(k) in October of 2008 had become a 201(k). … I had just published an op-ed in The New York Times that said we need to save pensions in the same way that we need to save housing and we need to save the banks.

So I testified in Congress that something drastic had to be done to make sure that people’s retirement accounts did not fall any further, and to move forward so they could accumulate enough money in their retirement accounts.

And I said to Congress, “We now have seen that the 401(k) experiment was a failed experiment.” This was the event that exposed the flaws in the 401(k) system. And I was right, but the industry pounced on me. And in fact, the lobbyists made jokes with me that I had just helped their business because I could be the one person that personified all the criticisms of the 401(k). I could be the big target, and so they could tell their clients, “Oh, you’d better give us more money as lobbyists, because Congress is going to regulate you once and for all.”

Well, they were right. It took four or five years for Congress to regulate them, but now we’re seeing that the 401(k) industry has to reveal some of their fees.

What did they criticize you for?

They criticized me I think for saying that the 401(k) industry is exposed, and here are the list of reasons why the 401(k) industry was always a failed system, was always a flawed structure for ordinary people to save their money.

But help me understand. How is it possible that 2008 happens? People lose half their retirement savings. … Did Congress, did the president, did nobody stand up and say, “Wait a minute, this is a problem”? Silence?

… The reason why Congress responded to the mortgage crisis, responded to failed banks, was because there were stronger voices for homeowners. There were stronger voices for communities that were facing a bankruptcy of their auto industry. And there wasn’t a strong voice for people who were really afraid about their retirement futures.

“The 401(k) in October of 2008 had become a 201(k).”

People [who] were afraid for their retirement futures are dispersed. They’re older workers who also might be losing their home and also might be losing their job. So the undercurrent of not having enough money for retirement, that pending crisis just took a back seat to the more immediate crisis of rising unemployment or home loss. But it doesn’t mean it’s not as important, and it doesn’t mean that it won’t strike people when they’re most vulnerable. …

So there was silence in Congress because I actually think a lot of congressional representatives, even senators, though they may care, were one step removed from what was happening in the lives of workers. They had better things to do, and the lobbyists for the mutual fund industry were really loud and convincing to say, “Lookit, we’re down; if you regulate us or scrutinize us, it’s just going to cause more confusion and more lack of confidence.” …

“We’re not a financial product that needs to be regulated”? …

I really was a minority voice in Congress that said these 401(k) products are a financial product just like all the financial products. People use these products for a very particular financial goal, and it should be put under a consumer protection agency.

But I lost that battle. The lobbyists for the mutual fund industry were just too strong and too well funded. But these products should be regulated like a financial product. They were never appropriate for the vast middle-class consumption that they are now. And the financial crisis of 2008 just showed that these products need more regulation, and that they’re very risky, and they can blow up. …

… In 2009 a company called BrightScope was created. Is this a good thing?

BrightScope is a for-profit company, and it saw an opportunity to help out employers that really wanted to do the right thing and provide their employees with a choice of products that would be appropriate for them. …

BrightScope does reveal the quality and the fee structure of a particular product in a mutual fund, but it can’t help people do the most important thing they have to do when they look at the Chinese menu of choices in a 401(k) system, and that’s how to put these pieces together to actually provide a secure retirement income for the rest of their lives. …

As I understand, it only actually looks at 50,000 programs, leaving 600,000 other 401(k) programs without any –

BrightScope is in the beginning stages. It’s looking at all the products in the 401(k) industry. It hopes to look at all of the products. It only looks at a fraction of the products, the most popular products. And as it looks at one, the products change, so they have a very big job. …

In 2010, I guess sometime this year, your friend Phyllis Borzi, [the assistant secretary for employee benefits security in the Employee Benefits Security Administration of the Department of Labor], finally did something about getting some transparency. What did she do, and how did she get there?

One of the bright lights in this 30-year history of 401(k) growth and the lack of regulation has been the Obama administration’s assistant secretary for pensions, Phyllis Borzi. She came to office … and said her top priority was to regulate this fairly unregulated industry, that at least workers would be able to find out what the price of their product is. They might not be able to find out the quality of their product, but at least they’ll be able to find out the price.

So starting in 2010, she wrote regulations. She wrote rules about what the mutual fund industry would have to reveal to workers about how much their 401(k) fees cost.

And it’s taken two years for those regulations to come into effect. So in the last months of 2012, employers are going to have to reveal to their employees what the price of their product is.

It goes in the right direction, this regulation, but it doesn’t go all the way, because even though people will be able to know in some uniform way what their fees are, they won’t be able to know the quality of the product, and they won’t actually have all the fees revealed. They won’t know all the things that they do that actually cause those fees to go up, like buy and sell the product too frequently.

… What was the opposition that she faced?

So Phyllis Borzi, her brilliance was to actually not go to Congress and ask Congress to change the law to make fees revealed. … What she did was just pass a regulatory rule. …

So she just did it as a matter of course?

Yeah, so Phyllis Borzi just did it as a matter of course in regulating these funds and figured out a way not to have to go to Congress. It took a long time, because even trying to implement a new rule can be slowed down by the lobbyists.

When this rule was enacted, what impact did it have?

It activated the lobbyists to actually try to slow down the implementation. So when this rule was enacted, there was a change in how it would be rolled out, and we haven’t seen what the reaction to the rule will be yet. We’re talking now in the fall of 2012, and not all workers have seen the documents that revealed the fees.

I think that it will have some effect, but not the kind of effect that we need to make these 401(k) plans work better for workers. It’s a step in the right direction to regulate these products as a financial product, but it doesn’t go as far as the rules that regulate mortgages or other financial products.

You also have a student, Robert Hiltonsmith. Talk to me about his work and what significance it’s had.

So Robert Hiltonsmith authored a study on 401(k) fees. It’s one of those studies that actually expose[s] a product. … This study really unpacked the kinds of hidden fees and direct fees that workers pay.

And what it did finally is to show that these fees add up, that if you pay these fees and these retail products, you’re going to erode your retirement savings by 20 to 30 percent, even if the stock market behaved itself, and even if you saved according to the advice to save 5 to 10 percent of your income without doing anything untoward at all. …

So what this report showed is that the 401(k) fees are corrosive over time. They look small at the very beginning. They’re hidden at the very beginning, but the product itself is too expensive for retirement savings. …

What was the reaction when that report came out?

The high-fee report came out in the summer, and the reaction has been explosive. The consumer activists, the consumer reports finally started paying attention to these 401(k) products as just another financial product. Oh, my gosh! We should be paying attention to these as we paid attention to high credit card fees or to subprime mortgages.

And so there’s a lot of popular exposure in publications that go to middle-class workers to say: “Be aware. These products may not be delivering the kinds of service that they promise.” …

The reaction I hope would be not better products from the industry but a wholesale restructuring of the way Americans save for their retirement accounts.

When we talked to mutual funds, their managers tell us that the fees are justified. They work really hard to figure out how to invest people’s money.

… The mutual fund industry [is] filled with lots of earnest people who do want to help people save for their retirement. But they’re actually selling a high-speed racecar to people who just want a secure car to get them to retirement.

So even though they’re trying to sell a racecar, a high-end luxury car at the lowest fee possible, and they’d be able to justify that a high fee is necessary for this high-performance product, it’s not the product that most people need. …

Why is this a product that’s not working? What exactly is wrong with the product?

The product was always really built for a different kind of consumer. A mutual fund is really there for people who have already saved enough for their retirement and in an institutional long-term investment product, who have already paid off their house and want to take their money and top off their [security] base for retirement.

It’s not an appropriate product for people who need to save a part of their paycheck every paycheck in order to have money for a long-term need for the rest of their lives.

Is an IRA a better product?

An individual retirement account is very similar to a 401(k) except it’s worse. The IRA is one of the worst places to save your money. At least the 401(k) has some scrutiny by an employer and has a more sophisticated buyer than an IRA buyer has. …

Both places are appropriate for people who want to top off their retirement savings or want to play with their savings to maybe earn a little bit of money. But it’s an inappropriate vehicle to provide a base of support for long-term savings. The IRA and the 401(k) do not have low-cost, long-term savings vehicles in them.

Anybody listening to you would say, “I might as well just put my money under my mattress.” Is that a good idea?

Many people don’t have any choices but to go to a 401(k) or to an IRA. Hiding your money in a piggy bank or under your mattress is not a good idea. You’re going to lose money just because of inflation.

So if you are going to save your money in an individual retirement account and a 401(k), the best thing to do is to demand from your investment adviser that you want a passive index account. These are [the] kind of accounts that Vanguard [has], … that has a loyalty to make money but doesn’t have any shareholders.

But the problem is, the person who wants to save their money in the lowest fee possible [is] going to be met with resistance from their guy. Their adviser doesn’t make any money if you put your money into a passive account. So anybody listening to me will just have to be strong, just like you’re strong when you buy a used car. You have to go armed with this sentence — “I want a passive index account” — and just say that sentence over and over and over again. Your guy, your broker-dealer, your adviser is not going to like what you demand. But at the end of the day, you have to buy only that product that’s appropriate for you. That’s not going to be easy. …

Why is a passive index fund better than a 401(k)?

A passive index fund is a more appropriate fund because what an index fund is, [it] just takes a little piece of the companies that are in an index. So there’s a Standard & Poor index of 500 companies, the S&P 500. But there are even indexes that are larger. The Russell 3,000 — that’s 3,000 companies.

And basically a computer chooses a portion of those 500 or 3,000 companies and puts it into your account. And a computer doing that automatically doesn’t have a mortgage to pay or a vacation home to pay or doesn’t require a salary. It doesn’t have a sales force attached to it, and it doesn’t have a big advertising budget.
All it does is take a little piece of the market and puts it into your account at a very low fee. And for over 30 years that we’ve been able to compare active managers to a passive manager, the passive manager does better over a period of time. ….

Let’s talk about your op-ed. … Tell me about writing this piece, how you came up with the idea and what impact it had.

I wrote a piece that was called “Our Ridiculous Approach to Retirement,” and that piece was just written out of frustration about the 30-year history of our retirement policy in this country, and also real empathy with people who were telling me that they were very afraid of retirement.

These were low-income people, these were middle-class people, and these were even rich people who said, “I don’t think I have enough.” And they were talking about something that was very basic to their needs: “I just want to know that I have enough money to live until I die.”

“It’s not the fault of people that they don’t have enough savings in their individual retirement account or their 401(k)s. It’s the fault of the system, and the whole system needs to be reformed.”

And the form of their worry came about in different ways: “I don’t have enough money now. How could I possibly have enough money when I retire?”; or, … “I know my employer is going to fire me because I’m too old, but I also know that I have to work longer.” Or the anxiety about retirement comes out among healthy, rich people that says, “Hey, I think I’m going to live until 100, and I don’t have enough money for that.”

… It’s not the fault of people that they don’t have enough savings in their individual retirement account or their 401(k)s. It’s the fault of the system, and the whole system needs to be reformed. People who are worried should not be victims and blame themselves. … Human beings are not the problem in this system. It’s the system that’s not appropriately structured for the human beings that are in it.

The banks will say, “People are just not saving enough.”

The industry, the banks, the mutual fund industry pivot the concern of workers by saying: “Well, you victims have your own selves to blame for not knowing what a stock and a bond was early on in your life, for not realizing when you were a young worker forming a family that you also had to save for your retirement along with your house, along with your unemployment, along with your child’s education.” …

So the banks are wrong when they tell workers, “You just haven’t saved enough.” Before the mutual fund industry took off and the 401(k) industry was able to protect itself from regulation, people did save enough for their retirement.

When people were in traditional pension plans, they saved 5 to 10 percent in their retirement accounts, along with saving for their house and saving for their child’s education, because the system was well structured for them to save for their retirement account.

It’s a false accusation that people didn’t save enough, or can’t save enough, because they want to live like grasshoppers and just consume all of their money now. It’s just not true. People will save appropriately if they’re in the proper vehicle. …

What we need in this country is not a voluntary, do-it-yourself saving system. It’s completely inappropriate for the way we live. We need a structure that expands upon our Social Security structure, that puts on top of Social Security kind of a Social Security plus, where we can save and have a guaranteed retirement account. …

Who’s listening to you?

I hope that people who are now struggling with keeping their jobs, over the age of 45, and are also struggling to save for their retirement, that they know that it’s not their fault that they don’t have enough money. …

When you talk about these workers, … there was a shocking statistic there about how much you needed to have when you retired.

… You need eight to 10 to 20 times the amount of your annual income when you retire in your retirement account to live comfortably.

In my article, I gave a top number of about $1 million to $2 million. But for a middle-class worker, having a million dollars when you retire will keep you comfortable for the end of your life. Having $2 million will keep you very comfortable with no risk at all of falling below your retirement living and have some inheritance left over.

How is the average middle-class worker going to amass $1 million by the time they retire?

Well, the average middle-class worker who had a traditional plan actually amassed close to the equivalent of a million dollars, but it never was expressed as a million dollars. It was expressed as a defined benefit for the rest of your life. Most of us actually are amassing a quarter of a million dollars, half a million dollars in our Social Security accounts.

Our Medicare account, our Social Security accounts, are worth almost a million dollars. We could amass a high-value asset when we’re in these guaranteed insurance products fairly easily. All it is is a contribution every paycheck.

But the 401(k) requirement is to amass it all in liquid accounts, and that’s nearly impossible. So what we need to do is to amass a million dollars’ worth of a promise of payment for the rest of your life into accounts that are more like insurance products.

So you believe in annuities?

Annuities are products that provide a stream of income for the rest of your life. They’re provided by the government, and they’re also provided by employers in a traditional plan, and they’re also provided commercially in the private market.
They’re provided by the government through the Social Security system. When we put 6 percent of our pay, another 6 percent and some change [that] our employer puts on our behalf into the Social Security system, we are buying the right to an annuity for the rest of our life. We don’t call it an annuity; we call it a Social Security benefit.

When we work for an employer that has a traditional pension plan, we’re putting 5 percent of our pay, 7 percent, 10 percent of our money toward a promise to pay you for the rest of your life.

When we try to go buy an annuity from an insurance market, we’re trying to take a hunk of money, $50,000 or even a million dollars, and go out into the market and say: “Hey, insurance company, here’s a lump sum. In return, give me the promise that you’ll pay me a stream of income for the rest of [my] life.”

The problem with going to the commercial annuity market with our 401(k) or IRA assets is that the insurance company doesn’t provide annuity to everybody else. They only provide annuities to people who want it, and they’re suspicious.
If you take your million dollars and want a stream of income for the rest of your life, they know that you know something they don’t. They know that you think that you’re going to live a very, very long time. People that have terminal cancer don’t go to an annuity company and say, “I want money for the rest of my life.” They know they’re going to die sooner than the average person.

So the private annuity company has to charge you for that risk of living too long, and therefore they’re giving you a bad deal because it’s a private annuity market. It’s a lot like sick people having to go out and having to buy private health insurance. The cost is way too high.

So I do not recommend that people take their 401(k) money or their IRA money and buy a commercial annuity. But what I’m saying is that everybody should have access to a low-priced, fair annuity product. But you can’t do that in the private market.

When you think about 10,000 baby boomers that are retiring every day, what scares you the most?

I’m really worried about that, because 10,000 baby boomers, 8,000 baby boomers are going to retire per day for the next 15, 17 years. We’ve done projections about how much money each of these people [is] going to have for the next 15 years, and we’re dismayed — actually much more. [We're] really panicked that many of these people will not have enough money to stay out of poverty.

Half of middle-class workers will be poor or near poor the day they hit 65, … because they don’t have enough money saved in their retirement accounts and because their house values have fallen so severely.
Those folks are going to try to work longer, and they’re meeting a labor market that is much more hostile to older workers than it has been in the past. They’re also meeting a labor market with very high unemployment. …

So we are finding that cities and states are now becoming aware that they have an older, vulnerable population on their hands. …

Are you optimistic?

I am, because of all the attention paid to this problem by state legislatures and by governors and by state treasurers. In fact, just last month the California Legislature and the governor decided they can’t wait for the federal government to do something about it, and they just passed legislation that will make it easier for all workers to save in a guaranteed retirement account.

Now, those accounts will be a competitor for Wall Street. But these are systems that will make 401(k)’s and IRAs just much more high-performing vehicles, so everybody should benefit. … So if the federal government won’t do something about their citizens’ retirement crisis, there are other local governments and state governments that will. …

President Barack Obama Weekly Address August 16, 2014 (Video/Trascript )

President Barack Obama
Weekly Address
The White House
Saturday, August 16, 2014

Hi, everybody. Over the next couple weeks, schools all across the country will be opening their doors. Students will suit up for fall sports, marching band, and the school play; moms and dads will snap those first-day-of-school pictures -- and that includes me and Michelle.

 And so today, I want to talk directly with students and parents about one of the most important things any of you can do this year -- and that’s to begin preparing yourself for an education beyond high school.

We know that in today’s economy, whether you go to a four-year college, a community college, or a professional training program, some higher education is the surest ticket to the middle class. The typical American with a bachelor’s degree or higher earns over $28,000 more per year than someone with just a high school diploma. And they’re also much more likely to have a job in the first place – the unemployment rate for those with a bachelor’s degree is less than one-third of the rate for those without a high school diploma.

But for too many families across the country, paying for higher education is a constant struggle. Earlier this year, a young woman named Elizabeth Cooper wrote to tell me how hard it is for middle-class families like hers to afford college. As she said, she feels “not significant enough to be addressed, not poor enough for people to worry [about], and not rich enough to be cared about.”

Michelle and I know the feeling – we only finished paying off our student loans ten years ago. And so as President, I’m working to make sure young people like Elizabeth can go to college without racking up mountains of debt. We reformed a student loan system so that more money goes to students instead of big banks. We expanded grants and college tax credits for students and families. We took action to offer millions of students a chance to cap their student loan payments at 10% of their income. And Congress should pass a bill to let students refinance their loans at today’s lower interest rates, just like their parents can refinance their mortgage.

But as long as college costs keep rising, we can’t just keep throwing money at the problem -- colleges have to do their part to bring down costs as well. That’s why we proposed a plan to tie federal financial aid to a college’s performance, and create a new college scorecard so that students and parents can see which schools provide the biggest bang for your buck. We launched a new $75 million challenge to inspire colleges to reduce costs and raise graduation rates. And in January, more than 100 college presidents and nonprofit leaders came to the White House and made commitments to increase opportunities for underserved students.

Since then, we’ve met with even more leaders who want to create new community-based partnerships and support school counselors. And this week, my Secretary of Education, Arne Duncan, announced a series of commitments to support students who need a little extra academic help getting through college.

This is a challenge I take personally. And to all you young people, now that you’re heading back to school, your education is something you have to take personally, also. It’s up to you to push yourself; to take hard classes and read challenging books. Science shows that when you struggle to solve a problem or make a new argument, you’re actually forming new connections in your brain. So when you’re thinking hard, you’re getting smarter. Which means this year, challenge yourself to reach higher. And set your sights on college in the years ahead. Your country is counting on you.

And don’t forget to have some fun along the way, too.

Thanks everybody. Good luck on the year ahead.