On this day in 1991, The Godfather: Part III debuted in France. It wasn’t a very memorable movie, except for the iconic quote “Just when I thought I was out… they pull me back in.” I was reminded of that line when I read that Rep. Ellison’s financial transaction tax (FTT) picked up a new co-sponsor. Just as Michael Corleone looked to leave a bad path behind, I hoped we had done the same for a tax that hits pensions and savers hard. But the retirement-minded keep getting pulled back in.
The tax – a levy on the buying and selling of virtually all securities – is terrible public policy when you consider the latest Pew Charitable Trusts analysis that reports the nation’s state-run retirement systems “had a $934 billion gap in fiscal year 2014 between the pension benefits that governments have promised their workers and the funding available to meet those obligations.” That means that right now, without a financial transaction tax, states and communities across the U.S. are in serious danger of defaulting on their promises to hardworking municipal workers like police officers, fire fighters, nurses and teachers.
So how is the bill progressing at all? It is being sold as something that will only target those who trade too much, speculate excessively or engage in ‘unproductive’ trading. In effect, politicians who have signed on as co-sponsors of the bill are saying ‘if you want to avoid the tax, avoid the behavior that invokes the tax.’ But in this case, the mere act of trading in any capacity whatsoever invokes the tax. And for pension funds, that’s unavoidable.
Consider the fact that the ability of anyone to minimize their exposure to any tax is a function of their flexibility. Pension fund managers have trading strategies that mandate the buying and selling of a certain amount of a certain portfolio of investments, on an ongoing basis. The manager needs to constantly invest the inflows of money from working plan holders and generate outflows to satisfy redemptions to retired plan holders. In other words, pension fund managers have no flexibility. Nor do their beneficiaries for that matter. Or the municipalities on the hook to make up the shortfall.
It is especially interesting that the new co-signer to the bill is a representative from California, a state famously struggling to meet its pension obligations. Case in point, take the retirees in the tiny town of Loyalton, California. Those with pensions administered by California Public Employees’ Retirement System (CalPERS) found their payments slashed by more than half when the municipal fee to fund shortfalls exceeded the town’s entire annual budget.
Rep. Ellison’s proposal is a vehicle that steers the secure retirement hopes of tens of millions of Americans directly into the path of an oppressive tax. I’m not sure why any politician would come along for that ride. But if asked, it’s an offer they should refuse.
BlackRock Viewpoint, June 2011