Before President Bush could even fire the first official volleys of his campaign to reform Social Security during last week's State of the Union, AARP, the nation's leading defender of the fund, was mobilizing its troops in vigorous opposition. Other groups with deep campaign pockets, like the Republican National Committee and the liberal group MoveOn.org, were also lining up in formation.
While the president told the nation last Wednesday that "all ideas were on the table," he seems to be gravitating towards a private account system that would resemble the Thrift Savings Plan (TSP), a retirement supplement created for government employees 20 years ago. It offers its 3.3 million members a choice of five private investment options: an S&P 500 index fund, a small-cap index fund, a bond fund, a variable rate contract and an international fund. It's managed by the Department of Agriculture and boasts roughly $140 billion in assets.
Current Social Security beneficiaries would see no change in their plan, Bush said. But younger workers would be given the option of investing a small portion of their benefits in private accounts, most likely mutual funds.
Democrats rushed to the defense of their party's 75-year-old prize Thursday.
"Privatized accounts for Social Security would cost trillions of dollars. Social Security would no longer be a guarantee for all Americans, but a jackpot for the lucky," said Sen. Carl Levin (D-MI).
Leaders of the 35.5 million-person strong AARP, meanwhile, have been girding for a fight since the November election. According to Evelyn Morton of the group's national committee for economic issues, members have already issued a combined 205,000 letters, telephone calls and e-mails to Capitol Hill denouncing the Bush plan. She expects their Congressional correspondence to continue at a rate of 3,000 to 5,000 messages per day.
AARP will further disseminate its opinion through stories in its member magazine and national newspaper advertisements. Last month, for example, the group took out ads in 53 newspapers and Capitol Hill publications as part of a $5 million print effort. While the Bush team plans to spend a reported $40 million on television alone, Morton declined to elaborate specifically on the AARP campaign budget going forward.
"We just know it is a signature issue for us, and we're going to commit resources," she said, adding that the campaign's goal is "for the American people to move forward on the Social Security issue. The first step is to take the concept of accounts financed with Social Security dollars off the table as a solvency option."
There is no single element of the Bush plan that is drawing particular attention from AARP. Its leaders dislike the idea of private accounts lock, stock and barrel.
"People already have vehicles out there, like 401(k)s and IRAs, in which they can invest. Taking money out of Social Security does not strengthen Social Security. Quite the contrary, it hurts Social Security and it hastens the day when Social Security will face financial problems. In short, it's expensive, it's risky, and it's unnecessary," she said.
In an open letter to its members, AARP President Marie Smith claims that switching to a system that includes private accounts could cost upwards of $2 trillion (last week, Bush officials put the number at $754 billion). AARP Chief Executive Officer Bill Novelli has said the Bush plan would leave retirees at the mercy of the stock market.
Morton added that despite rhetoric form the Bush camp, Social Security is in excellent condition with 3.3 workers for every person that receives benefits. She admitted that an influx of Baby Boomer retirees in coming years will impact that ratio, but said the system won't be seriously strained for another 40 years. In the meantime, she said, there are alternatives to strengthen Social Security, including raising the contribution limits to IRAs and other qualified accounts, tightening restrictions on pre-retirement withdrawals and raising payroll taxes for Social Security.
Wall Street's potential for gain isn't lost on AARP leaders, either. "We have said that Wall Street could gain from the fees that they would get. If you multiply [the fees by] 145 million accounts, you do come up with a fairly large number," she said.
The Securities Industry Association estimates that private accounts could earn money managers anywhere between $39 billion and $279 billion in fees over the next 75 years, which would represent only 1.2% to 7% of the roughly $62.4 billion the industry takes in each year in fees. That's a relatively modest sum, according to Lipper Senior Analyst Don Cassidy, who added that the cost of managing "tens of millions" of tiny accounts will drive the numbers down even further.
"If you do the math, it doesn't make much sense at all for the industry to be involved in the short term," said Cassidy, who supports the idea of private accounts and expects that Wall Street will remain "judicious and cautious" during the upcoming debate. "I say do the math in two senses: number one, whether it would be breakeven, let alone profitable, and number two, do the math to get the votes to pass something in Congress."
To even win over Republicans - a share of them are lukewarm over the idea - Cassidy expects a conservative investment package that will closely resemble the TSP, or another that includes lifecycle funds based on five different age brackets.
"You're not going to have your choice of highly expensive funds. No broker is going to be calling you up trying to move your plan. This has got to be real simple, or it doesn't have a prayer of getting passed," he said.
Then there's the question of who might manage the accounts. Popular opinion points to the U.S. Social Security Administration, but it could be put out for private bid within, say, five years or so. But even then, there might be few takers on Wall Street, since the average account balance, at least initially, would be small. The president proposes that beginning in 2009, workers could contribute 4% of their salary, up to $1,000 a year, to a private account, with that rising by $100 a year thereafter. If a fund company earned a 1% fee on that initial $1,000 account, it would take in $10 a year, barely covering the postage and printing costs of an annual report and four quarterly statements.
In the end, perhaps where Wall Street stands to benefit most is through an influx of new investors, freshly educated about the importance of sound retirement investing through the public discourse over Social Security privatization. "I hope that's true," Cassidy said.