Wall Street wary of Social Security
By Michael J. Martinez
Associated Press
NEW YORK — There's been a curious silence on Wall Street since President Bush proposed that Social Security be privatized.
Gregory Bull • Associated Press
It might seem that securities firms would be in for a windfall under the plan — the billions of dollars that would pour into private investment accounts would generate millions of dollars in new fees and commissions. But the big Wall Street firms haven't been publicly supportive of the idea, probably because they're not sure how profitable those accounts will be.
A stock trader takes a break outside the New York Stock Exchange building. Big investment houses already know from their 401(k) business that they don't stand to collect substantial fees from managing large numbers of relatively small Social Security accounts.
"The industry as a whole is going to be very quiet about this," said Greg Valliere, chief strategist at the Stanford Washington Research Group, the policy analysis arm of Stanford Group Financial Services. "People might look at this and see some kind of sweetheart deal, and that's not the case at all. The industry itself is split, and nobody wants the attention."
The ambivalent camp includes some of Wall Street's biggest names — Morgan Stanley, Merrill Lynch & Co., and JP Morgan Chase & Co., for example. Publicly, these and other Wall Street icons have little to say, other than to reiterate their desire for a Social Security system that pays benefits and remains fiscally responsible.
Private Social Security accounts are expected to look a lot like 401(k) retirement plans or 529 college savings plans — they will be small holdings, built with minimal deposits every month, offering low fees for the companies that run them. And that, for the largest Wall Street firms, is the problem.
Sources at the big companies, speaking on condition of anonymity, said that getting in on personal investment accounts just isn't in their business plan. They invest on a much larger scale, handling individual accounts that at minimum have balances in the tens of thousands of dollars.
"Small money" accounts like the proposed Social Security accounts require big investments in infrastructure and personnel, since investors must be able to rebalance their investments at any given time — although the vast majority of individual investors never do.
"I don't see this standing out on anybody's income statement," said Lincoln Anderson, chief investment officer at LPL Financial Services and an economic adviser in the Reagan Administration. "It doesn't seem to jump out as a high-profit-margin business. People put their money in and leave it in, so there's not a lot of big activity that goes along with these accounts. And that means little or no fees."
The firms most interested in privatization, then, will be those who already specialize in managing small money, such as Fidelity Investments, State Street Global Advisors or The Vanguard Group — the top three 401(k) companies in terms of assets under management. They already made the investment in the infrastructure and have experience in managing small individual accounts.
Even then, however, profits are likely to remain small.
"Is anyone going to make a lot of money on this per se? The answer is probably no," Valliere said. "These accounts would be expensive to manage, and the back office charges would be considerable. And if this actually happened, Congress would make sure nobody made a nickel."
Yet the Securities Industry Association, a lobbying group of 43 Wall Street firms, has come out in support of privatization. That's because there's one thing that most everyone on Wall Street can agree upon: Getting more Americans investing would be a good thing.
"If you get all these folks with private self-directed accounts, that may stimulate interest in other accounts," Valliere said. "More interest in investing could lead to more business, the kind of business that Wall Street really wants."
And certainly, a huge surge of money going into the markets — $54 billion per year, according to a research report released last week by Merrill Lynch economists Kathy Bostjancic and David Rosenberg — will increase demand for stocks and bonds. Mutual fund managers will have a field day, even if Social Security savings accounts are restricted to just a few risk-adverse fund options. Stock prices will rise and bonds — especially corporate bonds — also will see more investment.
"This looks great for private industry and corporations," Bostjancic said. "You're making it easier for them to borrow money with bonds and easier to raise cash in the capital markets. But as stock prices rise, investors will be buying these stocks at a higher price, per-dollar, and getting less stock for their money as time goes on."
Bostjancic estimated that an account could have annual capital appreciation of 6.8 percent, a term she calls conservative. "Honestly, we just don't know how the markets will ultimately digest this kind of infusion of cash."
And that kind of market volatility leads Wall Street to another question. What happens if the market crashes and irate Social Security recipients find their accounts severely depleted? However Congress structures privatization, the companies running the private accounts will demand protection against litigation.
Finally, there's the hypothetical, and somewhat unlikely, question of a severe market disruption — not just a crash, but a breakdown in which stocks lose much of their value, and take decades to get it back. After all, critics contend, who's to say that the last century doesn't represent one giant bull market, with a decades-long bear market just around the corner?
"You know, if that were to happen, and we were to have the market go down for a long period of time, this would be the least of our problems," Anderson said. "You can't really insure against that kind of scenario. If you had a 20-year down market, we'd all have to knuckle down and go back to work anyway."
