Street Wishes for Windfall

Allowing workers to divert some of their Social Security contributions to private accounts could prove a huge bonanza for financial services firms. But it would be a government-style bonanza -- in other words, one with a long lead time.

"They all win to a certain extent if Social Security is privatized," says Kenneth Worthington, CFA, an analyst with CIBC World Markets in New York and author of the Nov. 1 report, "Bush's Plan for Social Security Reform Could Be Electric for Financials." Fees to Wall Street firms will likely be in the billions. (Worthington's firm does business with and seeks to do business with companies covered in the report.)

In Worthington's estimate, letting workers redirect 4% of their 12.4% annual Social Security contributions to private accounts would generate a hefty $75 billion a year. That compares with the average annual $200 billion contributed to the mutual fund industry in the past seven years.

He forecasts that transferring this money from Social Security, where it is invested in Treasury securities, to private accounts would lead to a steady growth in earnings for most major brokers and asset managers, a demand for stock and corporate bond funds that could push stock prices higher, and more trading and capital markets activity.

The first beneficiaries would likely include large index-fund providers such as Barclay's(BCS), State Street (SST), Mellon Financial (MEL) Northern Trust (NT) and possibly Fidelity.

Where's the Money?

This cheery picture of Wall Street plentitude, however, might take a while -- if ever -- to materialize.

Even though Worthington believes that Social Security privatization has its best opportunity for enactment in 15 years, with President Bush's re-election and a Republican majority in Congress, he gives it only a 20% chance of success. And if it should happen, most financial firms won't begin to see benefits for at least five years or more.

The mutual fund industry's public reaction to the proposal is actually cool, if not downright frosty.

The Investment Company Institute, or ICI, which represents 8,000 mutual funds managing $7.5 trillion in assets, has said it is not lobbying lawmakers for privatization.

The concept, says institute spokesman John Collins, "looks good to those who don't think about it. The thought of having tens of millions of uneducated new investors is unthinkable to us in the mutual fund industry."