Wall Street Tepid Toward Reforms Social Security Investment Would Provide Only ‘Small Boost’
Wall Street could get a small boost if Congress adopts plans to let people invest some of their Social Security taxes in stocks or other securities, industry executives predicted Monday.
That rough consensus emerged after the Advisory Council on Social Security released its long-awaited report recommending investments to strengthen the retirement safety net.
The panel offered three proposals to put some portion of Social Security funds into stocks, but didn’t recommend a particular plan. For this reason, market watchers said the report itself will not have an immediate impact.
“The idea that the stock market will get pushed up because people are buying stock with Social Security money is just nonsense,” said Donald Straszheim, chief economist at Merrill Lynch & Co.
Any impact would be minimized as the plan likely would be phased in over time, and the new money injected in the market would be overshadowed by inflows from mutual funds and other existing retirement savings plans.
The most conservative of the three proposals would basically maintain the current Social Security system, while letting the government invest a block of about 40 percent of collections into private stock to increase returns.
The other two options would create individual accounts, similar to the current tax-deferred Individual Retirement Accounts, and allow workers to make choices on how the funds are invested.
One would keep the current system, but would add a 1.6 percent payroll tax. The government would invest this new money in a limited number of stock or bond accounts on behalf of individuals.
The other, the most dramatic of the three proposals, would give individuals the choice to invest half of their retirement contributions (or 5 percent of income) in a variety of traditional investments. The other half of the money would stay in a system like the current one and the payroll tax would increase by 1.5 percent to finance the transition.
Merrill Lynch, mutual fund giant Fidelity Investments and other big Wall Street firms support the idea of letting individuals invest some portion of their Social Security taxes into IRA-type retirement savings accounts. But because Social Security is the nation’s prime financial safety net for retirees, as well as the disabled, Straszheim said he imagines the government will retain considerable control over investment decisions.
Several Wall Street analysts have predicted only a modest slice of Social Security taxes will ever make their way to Wall Street, between $60 billion and $150 billion a year.
While those may seem to be significant figures, they pale against the $8.3 trillion in stocks by year-end 1995 or the $10.1 trillion in government and corporate bonds. By another measure, at least $200 billion flowed into stock mutual funds in 1996 alone.
“Incrementally, it would be a positive influence, but it wouldn’t be an overwhelming influence on stock prices,” said Jeffrey M. Schaefer, research director at the Securities Industry Association, Wall Street’s main trade group.
There will be other side effects. The reforms could result in Social Security reducing its government bond purchases, which could boost the yields of Treasuries, making them more attractive to investors, Schaefer said.
Professor Lawrence White of New York University’s Stern School of Business, in a May 1996 research paper for the mutual fund industry, pointed to numerous pitfalls. White is critical of state and local government management of employees’ pension funds, pointing investment blunders such as the Orange County, Calif. investment scandal.
And there’s the issue of political influences in the government’s investment decisions - will it allow purchases of tobacco companies stocks’ or shares of companies in out-of-favor countries, such as Cuba?
“The opportunities for political meddling … makes me very uneasy,” White said.
Furthering his unease is the amount of power and money the Social Security system could quickly amass under some of the privatization proposals - one government study said Social Security could wind up managing $1 trillion in stock investments by the year 2014 if 40 percent of the trust funds are invested on Wall Street. White said Wall Street analysts are underestimating the long-term effect of these privatization plans.