Investment pros see bonanza
Social Security proposal would add billions to investments and fees
By Ameet Sachdev and Lorene Yue, Tribune staff reporters. Tribune correspondent Mark Silva contributed to this report
chicago tribune
January 9, 2005
The prospect of 100 million Americans each having $1,000 of their Social Security contributions to invest every year has investment professionals salivating at the potential financial bonanza.
About $100 billion a year would be freed up for stocks, bonds and other investments under a tentative plan President Bush has floated to fix the Social Security retirement system by creating private investment accounts.
The fees paid to brokers and money managers could run into the billions.
President Bush is expected to unveil the plan in late February, with administration officials eyeing investment accounts that would hold two-thirds of workers' annual payroll taxes.
Though the White House has cautioned that Bush had not decided on a specific plan, the administration is leaning toward letting workers divert 4 percent of their wages, up to $1,000 to $1,300 a year, into personal accounts. The remainder of the workers' payroll taxes would continue going into the system.
"The potential for investment firms has to be mouthwatering," said Michael Falk, chief investment officer with Chicago-based ProManage LLC, which helps workers manage their employer-sponsored 401(k) accounts. "We're talking about billions of dollars."
The financial industry has long championed the partial privatization of Social Security. Besides the self-serving reasons, proponents argue that the accounts would introduce more Americans to the virtues of retirement savings.
Individuals might be encouraged to save more through individual retirement accounts or 401(k) plans.
Bush favors these accounts because they would expand his concept of an "ownership society" and also give younger workers the chance to earn a better return on their money.
An example: Promised benefits currently work out to about a 2 percent annual return on payroll taxes. Although investing in stocks and bonds comes with added risk, the same funds in a balanced portfolio might earn 5 percent.
The president has refrained from spelling out the specifics of any overhaul plan, instead attempting to "educate" the public about the looming budgetary crisis in a system projected to start paying out more in benefits for retirees than it collects in payroll taxes by 2018.
Partial solution
Still, the White House acknowledges that creation of personal savings accounts is not the entire solution to the crisis facing Social Security in coming decades.
In a private memo circulated to Republican allies on Monday, an administration official argues that guaranteed government benefits to future retirees must be cut substantially.
"We simply cannot solve the Social Security problem with personal retirement accounts alone," said Peter Wehner, Bush's director of strategic initiatives. "If the goal is permanent solvency and sustainability--as we believe it should be--then personal retirement accounts, for all their virtues, are insufficient to that task."
Public disclosure of the memo on Thursday sparked a firestorm of criticism from Democrats.
"When it comes to cutting Social Security benefits, this White House is wearing two faces," said Senate Minority Leader Harry Reid (D-Nev.). "In public, the president says he will protect Social Security benefits. But in secret memos to right-wing supporters, his advisors are revealing a very different plan."
White House spokesman Scott McClellan says this memo should not be taken as any conclusive reading of where the Bush administration is headed with Social Security.
"Personal savings accounts are part of a comprehensive solution," McClellan said Thursday.
The memo only adds to the formidable challenge Bush will face in winning approval of his controversial plan. AARP, whose 35 million members are age 50 and older, has launched a $5 million advertising campaign to oppose Bush's proposal. The group contends the accounts amount to gambling with retirement savings.
"The idea of diverting money out of Social Security is inherently problematic," said John Rother, policy director for AARP. "Any plan that takes money out of Social Security will make Social Security's problems worse."
In this politically charged environment, major financial companies are concerned about being painted as greedy. They are reluctant to speak out, let alone publicly endorse private accounts. When asked about private accounts, several companies, including American Express Financial Advisors, Edward Jones & Co. and Charles Schwab & Co., declined to comment.
"We are not out there lobbying in favor of mutual funds being a vehicle of investment for Social Security funds," said Paul Schott Stevens, president of the Investment Company Institute, the lobbying arm for the mutual fund industry.
Campaign contributions
But behind the scenes, investment firms and other pro-privatization business groups have reportedly met with White House and Congressional leaders. Many executives also raised millions of dollars in campaign contributions to Bush and other Republican leaders.
Meanwhile, industry groups have tried to downplay the potential financial boon to Wall Street.
The Securities Industry Association recently noted that the management fees that investment firms could charge would likely be lower than the costs of low-cost mutual funds. The group even tabulated that the potential fees generated over the next 75 years would make up a tiny fraction of the $3.3 trillion in revenues Wall Street firms are projected to earn over the same period.
To be sure, the administration has offered few details on how these accounts will be designed and administered. The most widely discussed proposal calls for any worker under 55 to divert 4 percentage points of their 6.2 percentage points in payroll taxes into private accounts. The federal 12.4 percent payroll tax is split between workers and employers.
At first, individuals would be limited to conservative investments, such as stock-indexed mutual funds. As accounts grow, say to $5,000 or $10,000, investors would have more choice, but still be steered to safe investments. As Bush says, nobody will be taking their payroll taxes to the racetrack.
Even with the chance to manage bigger accounts, some investment advisers are skeptical of the potential windfall.
"I don't think it's a boon at all [to independent advisers]; quite honestly, I think it's a headache," said Mark Bell, president of Mark Bell Advisory Services Inc. in Chicago. "I think it's the mutual fund companies and the brokerage firms that stand to gain." |
