Crain News Service
Everyone from Bill Clinton to Newt Gingrich has expressed interest in privatizing a portion of Social Security. Yet there's nervousness from a surprising camp: financial service companies.
Some experts wonder if the industry could profitably manage millions of accounts that would see less than $500 a year in contributions, yet probably carry major reporting requirements and substantial regulatory oversight.
"It's going to be extraordinarily difficult," said Avi Nachmany, research director of Strategic Insight LLC, a New York mutual fund research and consulting firm.
But others aren't as skeptical.
"This is an industry that's very good at figuring out how to make money," noted Marc Lackritz, president of the Securities Industry Association, which represents stockbrokers and favors the idea of personal accounts.
Indeed, William Shipman, a principal at State Street Global Advisors, Boston, is working with academics and actuaries to come up with a program that is economical to administer. He believes it is possible.
Finding a profitable way to administer all those accounts would be crucial to the political success of any privatization effort.
"I don't see how they can economically provide record keeping that would underpin a private Social Security system," said Patricia Dunn, chairman of Barclays Global Investors in San Francisco.
Barclays manages nearly $43 billion of the $70 billion Federal Retirement Thrift Investment Board, considered a model for many Social Security proposals. Barclays leaves the record keeping to the federal government and manages a $39.4 billion stock fund for just one basis point and a $3.5 billion bond fund for two basis points. The overall costs for the plan -- for both Barclays and the government -- are nine basis points. Key features that hold down costs are the plan's three index funds and a low level of support services.
The Social Security Administration is considered a low-cost operation -- for a government agency, at least. Of course, the agency does not maintain account balances on a daily, weekly or monthly basis, as mutual fund companies do.
Clearly, not all money managers think it is impossible to service small accounts profitably.
The Investment Company Institute's latest Mutual Fund Fact Book includes a chart showing 10% of funds surveyed in 1997 have no minimum investment requirements; 14% require no more than $500 initial investments.
Those dollar figures are in the privatization ballpark: Several proposals floating around Congress would let workers divert two percentage points of the current 12.4% Social Security payroll tax into private accounts; based on an average estimated Social Security wage of $27,894 this year, that amounts to about $600 a year for each worker.
New York-based Neuberger & Berman Funds, which manages $24 billion, allows investors to open accounts with $250, as long as they contribute $50 monthly.
Stanley Egener, Neuberger's president, estimates it takes close to 10 years before the accounts become profitable -- but he favors privatized Social Security accounts nevertheless.
