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Report Denies Privatization Windfall

By Ben White
Washington Post Staff Writer
Friday, December 10, 2004; Page E01

NEW YORK, Dec. 9 -- Opponents of creating private accounts under Social Security often argue that the primary beneficiaries would be Wall Street investment firms. Wall Street's main trade group on Thursday said it isn't so.

The Securities Industry Association said in a report that partial privatization under scenarios being considered could generate as little as $39 billion for investment firms over the next 75 years and no more than $279 billion.

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"It is hardly likely to be a bonanza for Wall Street," SIA industry research director Rob Mills said in the report. "Whether Social Security Reform ends up opting for simple individual accounts with limited options, or a full-service version, the outcome for Wall Street will be not be the feast of fees some have been keen to predict."

The report appeared to be a direct rebuttal to a study published in September in which University of Chicago business school professor Austan Goolsbee predicted Wall Street could collect $940 billion or more over 75 years, an amount he called the largest windfall in American financial history.

Privatization opponents quickly seized on Goolsbee's findings. Democrats, including then-presidential nominee Sen. John F. Kerry (Mass.), said the report proved that President Bush was pushing privatization to please Wall Street donors, who contributed generously to his campaign.

The SIA argued in its report that Goolsbee exaggerated the fees that investment firms would collect and overestimated the number of people who would choose to divert a portion of their Social Security payroll taxes to private accounts.

The SIA, like Goolsbee, addressed two privatization scenarios under consideration.

Under one, the federal government would administer private accounts in which workers could contribute a portion of their Social Security taxes to buy a very limited number of mutual funds tied to a stock index, such as the Standard & Poor's 500.

The SIA said this scenario would operate much like the Thrift Savings Plan, a government program that allows federal and military employees to invest part of their basic pay in index funds carrying very low fees. The SIA report suggested that Wall Street firms would pull in about 0.04 percent of invested assets each year based on this "limited choice" plan.

Based on a participation rate of 75 percent (Goolsbee assumed 100 percent), the SIA said Wall Street firms would get about $39 billion in fees over 75 years under this limited plan, an amount the group said was equal to about 1.2 percent of total anticipated revenue for the financial services sector over the same period.

Under a second scenario addressed by the SIA, investors who contribute more than a given amount, perhaps $5,000, to their private Social Security accounts would be allowed to invest in actively managed mutual funds that carry higher fees. The SIA said Wall Street would probably generate about $279 billion over 75 years under this plan, an amount equal to about 8 percent of total anticipated financial services revenue for the period, according to SIA figures.

Henry Aaron, a scholar at the Brookings Institution and an opponent of privatization, described the SIA comparison to the Thrift Savings Plan as faulty. He said administering a plan for millions of workers across different industries would be much more complicated and expensive than managing a single plan for federal employees.

And he said Wall Street firms would push to offer more expensive services. "I would fully expect and would not criticize folks on Wall Street for wanting to offer more plans with more services and, not incidentally, higher costs," he said.

In his study, Goolsbee estimated that Wall Street would collect closer to 0.8 percent of assets per year for accounts with limited investment options, generating about $940 billion over 75 years, or 25 percent of the current Social Security deficit. He said accounts with multiple options would generate about $1.2 trillion for Wall Street over 75 years.

Michael Tanner of the libertarian Cato Institute said the SIA numbers were probably more accurate than Goolsbee's. But he added that he believed both reports missed the point. "If everyone does well, and Wall Street makes money, why is that such a bad thing?" he asked. "To some degree, the rain falls on the just and the unjust alike."

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