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Funds eye Social Security
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July 7, 1999: 2:52 p.m. ET
As lawmakers bicker in capitol, funds realize reform could deliver billions
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - There may only be a slim chance that lawmakers will agree on a plan to reform Social Security this year, but one group has been waiting hungrily in the background for change -- the mutual fund industry.
If the U.S. government allowed Americans to control a portion of their Social Security account, it could mean billions of dollars for the $5.8 trillion fund industry.
"I think everyone in the industry realizes the potential here," said Burton Greenwald, a mutual-fund consultant at B.J. Greenwald Associates in Philadelphia. "It would be an enormous boost."
Partisan bickering in Washington has dimmed hopes for a vote on Social Security reform this year. At least 10 different plans have been proposed in recent months, including one by U.S. Rep. Bill Archer, R-Texas, chairman of the House Ways and Means Committee.
President Clinton last month unveiled a plan to set aside $543 billion for Social Security over the next 15 years. He said the plan would keep Social Security solvent until 2053.
About seven or eight of the plans would allow some portion of a person's Social Security dollars to go into mutual funds, said Trent Duffy, a spokesman for Archer.
Some plans would allow people to invest in private endeavors, while others, such as Archer's, would require the funds to be invested 60 percent in equities and 40 percent in high-quality corporate bonds, Duffy said.
A major sticking point is that Clinton wants the government to be in charge of investing, Duffy said.
Archer and other lawmakers are working frantically to reach a compromise agreement before the presidential campaign season gets into full swing.
"The window of opportunity was always slim, but there is still a possibility we can get something done," Duffy said. "The biggest reason we need to act now is because every year you put it off, the options get more limited and more drastic. The more we put this off, you either raise taxes or cut benefits."
Why is reform so important for mutual funds? Consider that the fund industry was built on the investing dollars of IRAs and 401(k) plans, said Bill Dougherty, an analyst at the Boston research firm Kanon Bloch Carre.
"It's obviously huge if they allow individuals to invest some portion of their Social Security," Dougherty said.
But fund companies are worried about appearing motivated by their own interests so they are staying less outspoken about a change, Greenwald said.
"The industry is taking a statesmanlike approach," Greenwald said. "They advocate privatization, but not so aggressively that they can be accused of pursuing it in their own self interest … Everyone is extremely sensitive of being branded greedy."
Most mutual fund companies are leaving the lobbying in the hands of the Investment Company Institute, the Washington trade group that compiles monthly data on fund flows, said Laura Lallos, an analyst at Morningstar.
While Lallos said it is hard to put a dollar figure on what reform would mean for the industry, it is likely fund companies will use the opportunity to introduce new investing products.
Yet investors shouldn't expect anything too soon, Greenwald said. He doubts Washington will manage to come up with a plan before the 2000 election heats up, but he thinks change will happen within five years. He also predicts restrictions on IRAs will be loosened, with higher allowable contributions and income restrictions.
"Inevitably there is going to be a growing awareness that Social Security is not enough," Greenwald said. "People are going to operate on the idea of building their own retirement program."
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