The road to ruinous financialization in the United States commenced in 1963, when the Studebaker auto company went broke and left many workers without pensions. Just over a decade later, Congress passed the Employee Retirement Insurance Security Act, which requires companies that offer retirement plans to manage those investments according to federal standards, ostensibly assuring wage earners of money to live on in retirement. ERISA was originally intended to insure defined benefit pension plans against failure, but by the ’80s these plans had been pre-empted by another well-intentioned government initiative: individual 401(k) plans. As corporate managers and investment firms manipulated these plans for their own gain, retirement savings became the fuel for widespread speculation and financialization of the American economy.

Pension savings, now estimated at nearly $3 trillion, could be invested in companies to finance productive growth, in bonds to fix bridges and build schools, in education loans and environmental protection. Instead, they have become rich fodder for Wall Street money managers. In the past three decades, partly because of this pension wealth, the financial services sector has increased its overall profits from 16 percent of total corporate profits to more than 40 percent.

Rather than distribute this profit to stockholders, financial firms reduced dividend yields from roughly 6 percent to less than 2 percent. Stock turnover accelerated, increasing traders’ commissions at the expense of the investors. Every year hundreds of billions of dollars of pension capital is diverted by senior management to stock buybacks. Dividends are not returned to the economy to fund innovation and growth. Instead they are often used to fund high-risk hedge funds and help private equity companies with their “buy it, strip it, flip it” acquisitions.

How did pension funds become so vulnerable? After ERISA was passed, CEOs and corporate directors became concerned about their responsibility to invest the funds according to these new rules. Their response was to delegate that responsibility to outside money managers, providing an unprecedented boost to the financial services industry. As the money flowed in, new norms promoting short-term results pushed aside any consideration of what might be good for overall economic growth. Money managers were called on the carpet every quarter and fired if their performance was not competitive.

To safeguard retirement funds adequately, government will have to rein in the broader financial industry and require money managers to handle these plans for the benefit of participants. Currency and credit must be controlled for the benefit of the general welfare, not for the speculators. Legislators should use their authority over tax and financial policy to restrict Wall Street’s ability to borrow for speculation—which will help prevent disastrous asset bubbles.

Specific reforms that would help protect Americans’ retirement nest eggs include:

§ Altering the incentives of money managers so they get rewarded for long-term growth and profit rather than for fixating on quarterly gains;

§ Requiring publicly traded corporations to use cash surplus for investment in growth or as dividends to the shareholders, not as managerial stock buybacks to hype the stock price;

§ Altering tax laws to make the payout of dividends tax-free for low- and middle-income wage earners.

The overall incentives of our financial sector must be re-engineered, made congruent with the long-term benefits of future retirees. The “inside game” that rewards the wealthy and well-connected must end. In its place, democratic capitalism should prevail.

Read the next proposal in the “Reimagining Capitalism” series, “The End of Capitalism and the Wellsprings of Radical Hope,” by Eugene McCarraher.