Windfall Likely on Wall Street from Bush Plan

WASHINGTON – Wall Street expects to make $39 billion over 75 years if the Bush administration succeeds in establishing private Social Security accounts, but the industry described that amount as “paltry” compared to estimates being promoted by critics of the proposal.During the presidential campaign, Senator Kerry touted a study that predicted the policy would create a $940 billion windfall for financial firms and consume one-fourth of the money needed to cover the costs of baby boomers moving into retirement.However, in a report released yesterday, an industry group analyzed the potential fees associated with private accounts and concluded “the impact on Wall Street will be limited.” Critics of the proposal immediately questioned the credibility of the study by the Securities Industry Association.“It’s sort of like the fox saying he doesn’t really like the taste of chicken – and to trust him at the hen house,” said Daniel Maffei, a spokesman for Rep. Charles Rangel, a Democrat of New York.President Bush has been pushing for a Social Security overhaul that would have let workers create private retirement accounts within the government-run program. He vowed yesterday that he would not increase payroll taxes to fund his proposal, leaving open the question of how the administration will pay for an estimated $1 trillion to $2 trillion in transition costs to create the accounts.The options include increased government borrowing or cuts to other areas of government spending. Mr. Bush has yet to spell out the details of a plan and said he would not “prejudge” the solution.“We will not raise payroll taxes to solve this problem,” Mr. Bush said yesterday after a meeting with Social Security trustees in the Oval Office. Mr. Bush said the up-front costs of the plan should be compared to the $11 trillion shortfall the program faces as baby boomers head into retirement and fewer workers remain to pay for their benefits.Some advocates of the accounts have said payroll tax increases would be necessary, but such increases would raise the ire of fiscal conservatives in Congress.By disavowing tax increases, the president is avoiding a “serious legislative and political morass” that could undermine the policy, said Richard Armey, the co-chairman of a group that lobbies in favor of the private accounts, FreedomWorks.A leading Democratic critic of the plan, Rep. Robert Matsui of California, said the president had “painted himself into a corner” with his remark.“The only thing he does not rule out is massive increases in the debt, but that would be a disaster not just for Social Security, but for the economy,” Mr. Matsui said in a statement.The White House spokesman, Scott McLellan, said the administration is not concerned that increased government borrowing would hurt the economy.He said financial markets “would look favorably” upon any plan that fixes the unfunded liability. “And if there are some short-term, up-front financing that is needed to do that, yet it brings down the overall cost of the program, they will view that in a very favorable light,” Mr. McLellan said at a press briefing.The House minority leader, Nancy Pelosi of California, said, “Democrats and Republicans should go to the table with no preconditions on either side.” However, she said, the policy “should not add to the deficit.”A senior official of a major investment banking firm yesterday echoed the report, saying Wall Street has little financial interest in private Social Security accounts.“We do not have a business interest in that proposition. …We have no skin in that game,” said the vice president for communications and public affairs at Merrill Lynch, Jason Wright.The perception that the proposed accounts would be a financial boon to the investment industry is “one of the greatest myths” in the Social Security debate, he said during a panel discussion of the state of the middle class organized by the Drum Major Institute.“You really can’t make money managing little accounts,” he said during the discussion at the National Press Club. Administering such accounts “is more complicated than people think,” given costs such as printing individual statements, creating individual computer access, and other client services, he said.In an interview following his remarks, Mr. Wright told The New York Sun that Merrill Lynch officially has “no position” on the accounts. He said the government should create more incentives for Americans to save for retirement.“Our view is that you have to do more than Social Security. Any policy that incentivizes savings is in the country’s best interest,” he said.In its report, subtitled “No Free Lunch for Wall Street,” the Securities Industry Association concluded that the accounts would not be a “bonanza” to Wall Street, because the types of funds that the accounts will be invested in will likely be limited to a few index funds with low fees.The industry group based its assumptions on a system currently in place for federal employees and military personnel called the Thrift Savings Plan. Under that plan, workers can choose from five index funds – three equity index funds, one mixed bond fund, and a U.S. Treasury bond fund.The president’s 2001 Commission to Strengthen Social Security recommended that private accounts be based on a similar system of centrally administered contributions that would be run by the federal government. Mr. Bush said yesterday that his thinking on the matter has been “colored” by the work of the commission, which was co-chaired by the late Senator Moynihan of New York.If the accounts are invested in funds similar to the Thrift Savings Plan, the association’s report estimated that the fees would be just over 10 basis points, or 0.101% – a tenth of the fees on mutual funds overall.The result stands in contrast to estimates in the study touted by Mr. Kerry. That study was conducted in September by a professor at the University of Chicago Graduate School of Business, Austan Goolsbee, and it assumed that accounts would carry much higher fees compared with those across the mutual fund industry.The industry study also arrived at its lower estimate by assuming that only 75% of workers would opt into the plan, which Mr. Bush has said would be voluntary. Mr. Goolsbee’s study assumed a 100% participation rate.The industry study also looked at a second option discussed by the president’s commission, under which contributions exceeding $5,000 could be put into higher-fee and higher-risk funds. Unlike Mr. Goolsbee’s study, which estimated that all workers would use this option, yesterday’s report assumed that fewer than half would choose to do so.The second option would generate $279 billion in fees over 75 years, the report concluded.The author, the association’s head of research, Rob Mills, said in a telephone interview that he undertook the study because he believed that the University of Chicago numbers were “wildly exaggerated.”“The main reason for the difference is we are not talking about a work of individuals choosing mutual funds, but an institutional world where they will benefit from much lower management fees,” he said.Mr. Goolsbee did not return a phone call seeking comment yesterday.Mr. Rangel’s spokesman, Mr. Maffei, nonetheless maintained that the University of Chicago study had more credibility.“It is a professional source, rather than an extraordinarily self-interested one,” he said.Mr. Maffei noted that during the debate over the Medicare prescription drug benefit, the pharmaceutical and insurance industries had argued that they had little to gain from the proposal. “When the final bill came out, (they) had large financial benefits in it for both of them,” he said.Mr. Maffei said it is impossible to know which study’s assumptions about fees are the correct ones because the Bush administration has not yet outlined details about the accounts.A lobbyist for a pro-private accounts group, the Alliance for Worker Retirement Security, Derrick Max, said the report confirmed his view that the agenda is not driven by the financial services sector.“The irony to me is that while I am accused of being a Wall Street-funded project, I have a hard time raising money from Wall Street,” said Mr. Max, who estimated that one-fifth of his funding comes from financial firms. The rest, he added, comes from business groups such as the National Association of Manufacturers and companies such as Pfizer.

Windfall Likely on Wall Street from Bush Plan

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