President Bush’s plan to partly privatize Social Security could be a windfall for Wall Street, generating billions of dollars in management fees for brokerages and mutual fund companies. But the proposal to allow individual accounts is getting a surprisingly tepid response so far from Wall Street.
To be sure, Wall Street firms may be giving the idea a soft sell for fear of generating a backlash among suspicious American taxpayers. But industry officials also point out that Bush has not offered any details of his plan for individual accounts, and they say — really, truly —there are reasons to believe it might not be an enormous boon for big brokerage houses and mutual fund companies.
They point to the example of the Thrift Savings Plan for federal workers, which has been cited as a potential model for Social Security reform. The 3.4 million plan participants currently pay annual administrative expenses of about 0.06 percent — or about $26 on a typical $44,000 account. That is tiny compared to the average 1.1 percent in fees paid annually by owners of regular stock and bond mutual funds, which would equate to nearly $500 on the same $44,000 account.
“In other words, it is hardly likely to be a bonanza for Wall Street,” said Rob Mills, vice president of the brokerage industry trade group Securities Industry Association, in a report published this month.
Still, because of the massive size of Social Security, with its 154 million covered employees, Mills estimated that even a simple program of individual accounts comparable to the TSP might generate $39 billion in fees, in present-value terms, over 75 years.
That would be just 1.2 percent of the financial sector’s projected total revenue of $3.3 trillion over that timeframe. But a more complex menu of options, which might be offered to participants whose accounts grow beyond, say, $5,000, might generate $279 billion in fees over 75 years, boosting projected industry revenues by about 8.5 percent.
The far smaller Thrift Savings Plan, with about $150 billion in assets, is mostly managed by Barclays Global Investors, a unit of the giant British-based investment management firm. Based on government figures the firm probably gets less than $50 million in annual fees for running four indexed stock and bond funds that include about $90 billion of the plan's assets.
The Investment Company Institute, the trade group for the mutual funds industry, issued a statement this week that supported Social Security reform in general but carefully avoided taking a firm position on individual accounts. The statement, from ICI President Paul Schott Stevens, said only that any such proposals “should be judged by whether they will bolster the long-term financial soundness of the Social Security.”
In an interview with MSNBC.com, Stevens pointed out that President Bush so far has not proposed shifting even "a dollar, much less billions of dollars" from the government to private mutual funds. The TSP funds cited as a model, he noted, are special government-directed index funds rather than mutual funds.
The ICI statement underscores the principle that Social Security should continue to provide a "floor benefit" to be augmented where possible by individual savings and employer-sponsored retirement plans like 401(k)s.
"We are not actively pushing a piece of legislation of any kind," he said. "We have not taken a position on the ultimate question of whether one or more proposals for private Social Security accounts should or should not be adopted. ... Frankly, I'm not sure we will in the future take such a position."
Critics unmoved
Wall Street’s reticence has hardly stopped critics of Bush’s plan from whipping up opposition by arguing that one of the main goals is to drive more business to Wall Street.
“It is true that this time around (industry executives) are being more cautious in terms at least of what they say publicly about the process,” said Greg Anrig of The Century Foundation, a New York-based think tank that opposes privatization. But he said brokerage companies, mutual funds and banks have been promoting the idea of privatization for years.
“Small wonder, since they stand to gain enormous fees if billions of dollars are shifted each year from Social Security payments into accounts under Wall Street management,” the foundation says on its Web site.
“Obviously Wall Street would love to have this tied up,” said David Wyss, chief economist for Standard & Poor’s. “The more money there is to manage the more money there is to be made.”
But he said Wall Street firms worry that a federal program “would be so heavily regulated you wouldn’t be able to make any money on them.”
And asset managers also have reason to be concerned about the potential for lawsuits from unsophisticated investors who might want to blame the industry for future losses.
“There is a liability side to it,” said Russel Kinnel, senior mutual fund analyst at Morningstar. “If you look at some of the bear market losses we’ve had, the negative reactions would have been far greater if it would have been some Social Security funds.”
Wyss said he generally favors individual Social Security accounts, but he and others note that such a reform would not necessarily do anything to solve the system’s long-term funding. In any case, he said Social Security’s solvency problem “is trivial compared with the Medicare problem” that is not being addressed at all.
Other Wall Street analysts and economists, including most members of MSNBC’s panel of forecasters, caution that individual accounts are no panacea and will do little to improve Social Security finances unless accompanied by benefit reductions, tax increases or both.
“I’m not convinced that privatizing Social Security is the answer,” said Sung Won Sohn, chief economist of Wells Fargo. Any individual accounts should be limited to middle and upper-income earners “who can afford to gamble in the stock market,” he said.
“The one thing we do not want to see is people of low and moderate income, with limited retirement benefits, to find out that their Social Security benefits have been wiped out by a stock market crash,” said Sohn. “We just can’t do that.”
Gary Thayer, chief economist for A.G. Edwards, points out another aspect of Social Security reform that is leading to some skepticism on Wall Street: The cost of switching to individual accounts – estimated at $1 trillion to $2 trillion – would badly worsen the federal budget deficit in the short term. “That’s not something I think the credit markets would appreciate,” he said.