Wall Street optimistic yet pragmatic on Social Security

Many workers at investment firms view Bush's plan favorably, but few see a boom for themselves.

Joseph Malone, dressed in an electric-blue shirt that identifies him as an assistant trader on Wall Street, is an enthusiastic supporter of President's Bush's plan to add private accounts to Social Security.

"I don't look at it as risky," he says while on a break outside the New York Stock Exchange. "It's a good opportunity for younger people like me who may not have much of Social Security around when they retire."

Not surprisingly, the president can count on the pinstriped set. Wall Street generally thinks it's a good idea, in good measure because it means more money going into the stock market.

"Almost everyone on Wall Street feels you have to do something," says David Wyss, chief economist at Standard & Poor's. "They believe in this idea of private accounts, and it puts a lot more money into stocks."

Few brokers, however, expect to get rich writing orders on Social Security accounts, even though the volume could ultimately end up in the trillions. And the nation's financiers don't seem to have the same sense of urgency as Mr. Bush. This past November at the annual meeting of the Securities Industry Association, private accounts didn't come up in any of the speeches.

Indeed, the SIA, which lobbies in Washington, says Social Security is not its top priority. "Our priority is the permanence of the tax cuts for dividends and capital gains," says Margaret Draper, an SIA spokeswoman.

Few brokerage houses want to talk about the issue for fear they might alienate clients. For example, even though the chief investment strategist at Charles Schwab, the discount broker, spoke positively about private accounts at one of Bush's economic events, "We're not actively involved in the debate," says a Schwab spokeswoman.

Some are trying to tread the middle ground. That's the case at Goldman Sachs, where the issue is a "hot topic," says Robert Hormats, vice chairman of Goldman Sachs International. Mr. Hormats, who has served in Washington, says the system needs to be fixed, "and the sooner, the better and the easier it will be." Yet he adds, "There's not any particular outcome we want to see. We just want to contribute to the process."

Another visible face of Wall Street, Peter Peterson, senior chairman of the Blackstone Group, has written books and spoken widely about the problems facing Social Security. But it's doubtful anyone will be asking him to speak out for private accounts, which he has described in his most recent book as a "no-win shell game." (He is in favor of mandated retirement accounts invested in global equity and fixed-income index funds.)

During a recent stroll down Wall Street, it was clear that at least some people were ready to share their views. On one corner, the Lyndon LaRouche fringe group was handing out brochures describing the privatization as a "Foot in the Door for Fascism."

"We're getting a lot of people who say, 'I agree, I agree,' " says Vicky (who didn't want her last name printed).

One of those is a trader by the name of Frank (no last name, he asked), who was scurrying through the cold without a coat. "Risky" was his only comment. But nearby, J.P. Azoulay, who works on the floor of the Big Board, said the private accounts "sound pretty appealing" and "are worth looking into."

In fact, Wall Street's analysts have already been doing that. Last year, the SIA wrote a report that concluded the accounts would be "No free lunch for Wall Street." The report's researcher assumed that there would be a simple system where individuals could choose to invest in a number of index funds, which would generate $39 billion in fees over the next 75 years. While that may sound like a lot, it would represent only 1.2 percent of the estimated $3.3 trillion in revenue (in present-value terms) over the same time period.

The SIA figured the fees on the basis of those generated by the Thrift Savings Plan (TSP), a retirement plan for federal workers and military personnel who can opt to invest a percentage of their pay in any of five funds (three equity, one mixed bond, and one Treasury bond fund). Some analysts envision the Bush plan as resembling the TSP.

Barclays Global Investors, based in San Francisco, manages $130 billion to $150 billion for the 3.4 million TSP participants. Barclays charges about 0.06 percent of the assets to manage the money, compared with a typical charge of 1.25 percent for a mutual fund.

"Mutual funds have far higher costs to administer than we do," says Kathy Taylor, a managing director at Barclays. "Here we have a very limited number of very large accounts, so our fees are markedly lower."

But Ms. Taylor, who manages the relationship to the TSP, says Barclays also has a certain amount of risk in running the funds. "If anything goes awry, the managers pony up," she says. "We spend a lot of money on operational risk controls."

At the same time, the fund is constantly trading stocks to keep the accounts balanced. If Barclays doesn't perform in line with the index it's trying to replicate, that, too, can cost the manager money.

Still, the funds from Social Security could inject new money into the stock market. The current market value of the Standard & Poor's 500 is about $11 trillion. If 75 percent of those eligible were to opt for market accounts, it could add several more trillion dollars to the market. "It's not a trivial amount," says Mr. Wyss, who estimates it could run as much as 7 percent of the value of the S&P 500.

The new money could come at just the right time, says Taylor. "As boomers retire, there has been a lot of press about the liquidation effect on the market," she says. "But the creation of these voluntary accounts could be sort of offsetting like an intergenerational transfer," she says.

"One thing that's been overlooked is that as money flows into the markets, companies can use that for new debt issuance or new equity issuance, which helps to create new profits."

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