NYTimes.com > Business

Wall Street Hears Pitch for Social Security PlanBy EDMUND L. ANDREWS

Published: January 11, 2005

WASHINGTON, Jan. 10 - Treasury Secretary John W. Snow began
a three-day sales effort on Monday to drum up Wall Street
support for President Bush's plans to overhaul Social
Security. 

Despite what some see as the potential boon to the stock
market from allowing younger employees to invest part of
their Social Security tax payments in personal accounts,
many Wall Street economists are dubious about the costs.
Administration officials acknowledge that their plan could
require the government to borrow as much as $2 trillion
over the next two decades, to pay for costs during a
transition period when the government still has to pay full
benefits to existing retirees. 

In private meetings, Mr. Snow will confer with top
executives from the biggest bond-trading firms on Wall
Street and is expected to argue that such borrowing would
more than pay for itself at the end of 75 years. 

Industry executives said the meetings would include firms
like Goldman Sachs, J. P. Morgan Chase and Lehman Brothers.
Mr. Snow is also expected to meet with brokerage firms and
mutual fund companies that could end up managing the
personal savings accounts. 

"The secretary will make the case that reform is needed to
guarantee retirement benefits for today's youth, given the
system's insolvency," said Robert Nichols, a spokesman for
Mr. Snow. "The byproduct will put the nation's fiscal
affairs in order by addressing the $10 trillion in unfunded
obligations, a move that will be well received by the
financial markets." 

But several Wall Street economists expressed doubts about
the potential impact on interest rates from floating
hundreds of billions of dollars of additional government
bonds at a time when it is not clear how the Bush
administration is planning to reduce the existing budget
deficit. 

"The overall impact on the Treasury market would be
negative," wrote Kathleen Bostjancic, a senior Merrill
Lynch economist, who estimated that the administration plan
could lead to increased government borrowing of $54 billion
to $120 billion a year for the next 20 years. 

Administration officials argue that the new borrowing
should have no impact on the market, because investors
already know the government faces at least $3.7 trillion in
unfunded Social Security obligations over the next 75 years
- $10.4 trillion if projected over an "infinite horizon." 

Supporters of the proposal say bond investors have already
accepted the argument that any extra borrowing will only be
transitional and will be repaid in future decades. 

Other analysts note that the increased government borrowing
will be offset by the money that flows into personal
savings accounts. "It would be a wash, with no change to
overall savings," said Lyle Gramley, a former Federal
Reserve governor. 

Indeed, thus far bond investors have shown little
discomfort about the prospect of vast additional federal
borrowing. Even as President Bush has made it clear that
overhauling Social Security is his top domestic priority,
long-term interest rates have remained very low, at about
4.2 percent. 

But many Wall Street analysts say that bond investors have
not yet focused on what the future impact of the plan might
be if it became law. 

"There is no question that the markets have not reacted
negatively," John Lipsky, a supporter of personal Social
Security accounts who is chief economist at J. P. Morgan
Chase. "Is it because they are O.K. with it, or is because
they don't think it will happen? My guess is that a lot of
people haven't thought very clearly about it." 

A number of economists argue that a substantial need for
additional Treasury borrowing over the next decade or two
could put extra pressure on interest rates relatively soon,
while future benefits are so uncertain that most bond
market investors do not take them into account when
deciding where to put their money. 

"The government has no legal obligation to pay anything in
the future," said Richard Berner, a senior economist at
Morgan Stanley. "But once the debt is issued, it will be
out there with the full faith and credit of the government
behind it. The benefits - that's a different story." 

Wall Street support is crucial to Mr. Bush's plans.
Financial firms would end up managing much of the money
that people would be allowed to divert, under Mr. Bush's
approach, from payroll taxes to personal accounts. 

Despite the apparent windfall in business that could
create, many Wall Street executives are less than
enthusiastic about administering tens of millions of very
small accounts if, as is likely, the government forces them
to charge much lower fees than on traditional mutual funds.


But administration officials have already signaled that the
government would probably take responsibility for accounts
of less than $5,000, relieving financial companies from
dealing with millions of accounts that would probably be
unprofitable. 

"I think Wall Street will react fairly favorably," said
Stanley Fischer, vice chairman of Citigroup, at a
conference of economists last weekend. 

Far more important is support from bond market investors.
If investors gag at the prospect of vast new federal
borrowing, the value of Treasury bonds could plunge and
interest rates would rise. 

Even a hint of panic in the bond markets would be enough to
kill support for Mr. Bush's plans in Congress. 

Lou Crandall, chief economist at Wrightson ICAP, a
bond-market research firm in New York, said bond investors
might become inured to huge government borrowing - about
$1.8 trillion in additional federal debt over the last four
years. 

But Mr. Crandall said the Social Security plan could
require less borrowing than expected, if only because
people might adopt personal accounts more reluctantly than
either Mr. Bush or his critics anticipate. 

Few specialists, however, accept the administration's
argument that the huge borrowing years ahead would have no
impact on Treasury prices. 

Bond investors would be confronted with a very tangible
deluge of new Treasury securities to buy and a much hazier
promise to reduce borrowing in 30 to 60 years as the
government cuts back on future Social Security benefits. 

"What if the government comes under pressure to bail out
people in the future?" asked Ms. Bostjancic of Merrill
Lynch. "You could have even more borrowing." 

"Theoretically, if we are all sitting in Bonds 101, the
math makes sense. But I think the actual market reaction
would be different." 

Administration officials have said they also would like to
drastically change the way future benefits are calculated,
indexing them to rises in consumer prices rather than to
increases in wages. Because wages grow faster than prices
over the long term, congressional analysts estimate the
change would reduce a person's initial retirement benefit
in 2065 by more than 40 percent from what is promised under
current law. 

But Mr. Berner, of Morgan Stanley, said it was impossible
to assume that the government would cut benefits for people
who retire 60 years from now. 

"I don't know how you can figure out a law that says what
benefits will be in 75 years," Mr. Berner said. As a
result, he continued, investors could conclude that the
future cuts were unrealistic and that Mr. Bush's plan would
ultimately make borrowing higher rather than lower."