As the Republican convention gets under way this week, one subject that won't make prime time is privatizing
Social Security.
In his 2010 Roadmap for America's Future, presumptive Republican vice presidential candidate Paul Ryan proposed a plan to allow younger workers to allocate more than one-third of their
Social Security taxes to personal accounts that they would manage.
But, given that that the idea went over like a lead balloon when suggested by President George W. Bush in 2005, it's unlikely to find favor within the GOP— and certainly not within the Democratic Party.
“I think that debate is dead for this campaign,” said Ric Edelman, chief executive of the Edelman Financial Group. “There was momentum for the idea before tech stocks blew up and then 2008 happened, but the last five years have reinforced fears about gambling
Social Security savings in the stock market.”
Mr. Ryan, who has long been a more vocal proponent of privatization than his Republican presumptive running mate, Mitt Romney, has argued that it could theoretically produce higher returns than the Treasury securities in which
Social Security trust funds are invested.
Although the Wisconsin congressman didn't include privatization in his last two budget proposals, a bill he co-sponsored with former Sen. John Sununu, R-N.H., in 2005 would have let individuals funnel as much as 50% of their
Social Security taxes into private accounts.
"A NON-STARTER'
With investors still suffering from the financial crisis and still blaming Wall Street for the mess, though, the idea isn't likely to be popular with voters.
“Privatization is a nonstarter,” said Greg Olsen, a partner with Lenox Advisors Inc. “People don't trust the stock market and they don't trust Wall Street. I think the Republicans will leave this hot-button issue alone.”
While privatization might seem a potential multitrillion-dollar windfall for Wall Street and financial advisers, experts say that most firms would want nothing to do with it.
“The industry doesn't want to manage tiny accounts representing millions of individuals,” said Virginia Reno, a vice president at the National Academy of Social Insurance. “Someone has to take care of every individual, and the record keeping is onerous.”
One wirehouse adviser, who asked to remain anonymous, said that his firm wouldn't want the business. “It would be a huge drag on resources. No adviser would want to manage those accounts,” he said.
The adviser thinks that privatization is a good idea given the “unsustainable math” underlying the current system, however. He suggested that the solution could be along the lines of state-run Section 529 college savings plans, with a few service providers offering limited investment options.
Michael Tanner, a senior fellow at the Cato Institute, a libertarian think tank, suggested that the Federal Thrift Savings Plan that covers federal government employees could be a model for a partly privatized Social Security system.
He suggested that, because of the massiveness of such a system, private Social Security accounts could be organized regionally, with the job of managing funds put out for competitive bid and shared among multiple asset managers. The Cato Institute advocates allowing 6.2% tax diversions to private accounts — the full amount of employee contributions.
“There would be no change in the collections process, and once a year employees would designate which accounts to deposit the money into electronically,” said Mr. Tanner.
THREE ALLOCATION OPTIONS
He suggests three options based on allocations between stocks and bonds — 70/30, 60/40 and 50/50 — and believes the plan could be achieved at an administrative cost of as little as 40 basis points.
Whether it's cutting benefits, raising taxes or carving out funds to earn better returns in private accounts, virtually all experts agree that something has to be done to bolster the Social Security system.
Just don't expect the Republicans to be talking about it much this week.
“I think the Republicans will tone down the rhetoric on Social Security, or they'll have no chance to win Florida,” Mr. Olsen said.
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