Wall Street Quietly Promotes
Overhaul of Social Security

By JACKIE CALMES
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- It would take lots of time and money to persuade Americans to end Social Security as they know it. But some in the financial industry are spending both, with just that end in mind.

Their ideal alternative would privatize the government's biggest and most popular program, replacing Social Security with millions of individual retirement accounts earning higher returns for savers -- and millions of dollars in commissions for the money managers. But given the industry's obvious self-interest, its biggest challenge is not to appear too eager. "Overt lusting for this would be self-defeating," warns Rep. Earl Pomeroy, a North Dakota Democrat. Some consumer and labor groups already are raising red flags.

So proponents are keeping a low profile and digging in for a campaign of at least several years. Led by the likes of pension company State Street Boston Corp., they are sponsoring public-policy forums and bankrolling think tanks to put an intellectual face on the issue, stoke a national debate and, they hope, eventually make the sale.

It's not traditional lobbying, says Rep. Pomeroy, a skeptic about privatization, "but it's very influential."

Bipartisan Caucus

And there are early signs of progress. Until just recently, politicians uttered the very term "privatization" at their peril. But on the eve of last month's election, GOP Rep. Jim Kolbe of retiree-haven Arizona did just that in town meetings. At the Capitol, his new bipartisan caucus on the issue will regroup when Congress returns in January. More significant, given Democrats' traditional fealty to the current system, Senate Minority Leader Thomas Daschle last week went beyond anything the noncommittal Clinton administration has said and endorsed a limited plan by which the government would invest some trust funds in stocks as well as Treasury bonds.

The industry would go much further than that. State Street lays out its case for replacing Social Security with private savings in a new book by its chairman, Marshall Carter, and William Shipman, a principal at the firm. "I believe State Street would benefit. I certainly hope it would benefit," acknowledges Mr. Shipman. "And all of our competitors would benefit. But the more important thing is the whole U.S. economy would benefit and, most importantly, low-income workers would benefit."

The industry's push, low-key as it has been, nevertheless has spawned opposition that signals the political hurdles ahead. Labor, liberal and consumer groups recently held a news conference to condemn what they called "Wall Street's hush-hush campaign to privatize Social Security." The potent seniors' lobby, the American Association of Retired Persons, doesn't rule out more diverse government investments but is cold to industry's ideas for individual accounts. "There is large money being poured into this, and it's coming from the financial industry," says Evelyn Morton, an AARP legislative representative.

Supporters consciously laid low this election year, for fear that campaign rhetoric would polarize the issue; as it happened, candidates from President Clinton and rival Robert Dole on down avoided the politically charged topic. Now that the election is over, pro-privatization forces hope the debate can begin with the imminent report of a Social Security advisory commission that Mr. Clinton named two years ago.

Three Proposals

The divided 13-member panel actually will propose three separate remedies for Social Security to meet the looming financial challenge of the Baby Boomers' retirement costs. One idea would have the government invest a portion of the current surplus in stocks, in hopes of higher earnings to fatten the trust funds; that's the sort of option Sen. Daschle supports. Two proposals closer to what industry wants would mandate that individuals invest some of their own payroll taxes -- but at the cost of raising payroll taxes to maintain current retirees' benefits.

Different as those plans are, what gives Wall Street hope is that common to all is support for the concept of investing in the stock market at least some of the Social Security payroll taxes, now about $400 billion a year.

Besides pushing its own plan, State Street is seeding other research groups with about $100,000 in grants -- including about $20,000 each to the libertarian CATO Institute's privatization project, of which Mr. Shipman is a co-chairman, the centrist Democrats' Progressive Policy Institute and the Employee Benefit Research Institute, which is hosting a Social Security conference Wednesday. Last month, State Street sponsored a Council on Foreign Relations program on Social Security and public-pension systems world-wide, along with Fidelity Investments and J.P. Morgan & Co.

CATO has a $2 million budget over three years to fund research, conferences and other activities to involve groups, members of Congress and their staffs. Benefactors include, besides State Street, the insurance company American International Group Inc., American Express Co., discount brokerage company Quick & Reilly Group Inc., Digital Equipment Corp. and International Business Machines Corp. Yet Michael Tanner, a CATO director, says, "Wall Street has been cautious about committing money to this, partly out of a sense of how the self-interest factor will be criticized."

Seeking Grass-Roots Support

Sam Beard, president of the business-financed, pro-privatization group Economic Security 2000, says he has nearly met a budget goal of $1 million annually for three years, with help from Motorola Inc., DuPont Co. and Morgan Stanley & Co., among others. He aims to influence the debate by traveling widely to build grass-roots support. "If this simply becomes a business initiative, we're going to lose," he says.

Citizens for a Sound Economy, financed by businesses and wealthy conservatives, has budgeted about $2 million for media ads and other activities in the next year. And industry groups are active, notably the Investment Company Institute, which lobbies for the mutual-fund industry, and the Securities Industry Association, along with the Chamber of Commerce, National Association of Manufacturers and other business lobbies desperate to duck higher payroll taxes.

But with the issue so new, and ideas so diverse, "It's not ripe to be taking any case" to Congress, says Mark Weinberger, a partner in the lobbying firm Washington Counsel. Instead, that firm, which counts among its clients Investment Company Institute, Merrill Lynch & Co. and Aetna Inc., in September hosted experts from across the political spectrum to discuss "Social Security Reform: Putting the Markets to Work."

At the Progressive Policy Institute, vice president Rob Shapiro says he will participate in three forums this month alone, and he turned down a fourth. Privatization proponents are eager for the Democrat's support, but instead Mr. Shapiro has grown more skeptical. His own emerging proposal would experiment with mandatory savings accounts but rely more on such traditional Social Security fixes as raising the retirement age and limiting cost-of-living increases.

Privatization advocates, he says, "are way ahead of the debate," as the public isn't convinced of the need to change a system currently in surplus. "Politically they're kind of endangering the whole reform movement," Mr. Shapiro says. "There's a story line out there: 'Wall Street is trying to steal Social Security.' "

Democratic Rep. Robert Matsui of California says that, to his surprise, constituents do raise the issue, chiefly younger workers dubious about Social Security's future. But he adds, "It's easy to talk now [about privatization] when the markets are doing so well."

Yet if a stock market crash is the worst nightmare for privatization supporters, the Wall Street "story line" is an ever-present danger. Says Rep. Kolbe, who insists that Wall Street interests had nothing to do with his pension caucus's formation, "There are just some things that the industry has to take a back seat on."

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