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Special Report

ESG: The metrics jigsaw


Pensions surface in electioneering

Asset management could be one of the industries more affected by the US presidential election. Since last summer the International Strategy & Investment (ISI) Group’s analysts have been recommending investing 15% of a ‘Bush portfolio’ – 20 stocks that would outperform the market if the incumbent is re-elected – in shares of State Street, T Rowe Price and Charles Schwab. The ISI says that “vastly expanded IRAs and social security private accounts could increase the amount of assets under private management” – and of course asset managers’ profits.
Such advice looks like justifying John Kerry’s accusations that Bush’s pension reform is a big ‘gift’ to his friends. “George Bush’s scheme hurts seniors by cutting benefits and it hurts our economy by increasing the deficit,” Kerry says in a speech. “The truth is, the only people who benefit from George Bush’s social security scheme are the special interests.”
The Kerry campaign mentioned a study by Chicago Business School professor Austan Goolsbee about Bush’s plan to privatise social security. According to the report, financial institutions would earn $940bn (e764bn) in fees for managing the new private accounts. Not only did Kerry refuse to discuss any kind of privatisation of social security, he also promised to “protect social security, not raise the retirement age, not cut benefits for people that rely on them, not raise taxes on the middle class”.
A partial privatisation of social security was already one of the issues of the 2000 Bush campaign, but in his first term the president never proposed social security legislation and largely ignored the recommendations of a Social Security Commission that he had named, and that in December 2001 offered three options for an overhaul including private accounts.
In the 2004 campaign, Bush has resuscitated the idea, declaring to the Associ ated Press: “We’ll keep social security’s promise to today’s seniors, while strengthening it for future generations, without changing benefits for retirees or near retirees or raising payroll taxes. We will instead add voluntary personal savings accounts to allow today’s workers to build a nest-egg that can be passed along to their families. These accounts could be
part of a comprehensive plan, which according to the social security actuaries will strengthen the system permanently.”
He didn’t give more details, but some people close to his administration suggest what Bush’s plan might look like: younger workers would be allowed, but not required, to have private accounts in addition to getting federal benefits. Of payroll taxes – currently 12.4% deducted from the first $87,900 of wages – perhaps two percentage points could be diverted to fund private accounts, which could be invested in mutual funds sanctioned by the government.
Private accounts’ fans – such as the Cato Institute and the former State Street Global Advisors’ principal Bill Shipman – stress that the “$940bn windfall” coming from the privatisation of social security is a great exaggeration. They say that Goolsbee’s assumptions seem to be based on 401(k) and mutual fund plans “with all the bells and whistles”, while by limiting options and structuring the accounts carefully, administrative fees could be dramatically reduced.
A model for the new private accounts could be the government’s thrift savings plan for federal workers, which yields lower administrative fees. “Estimates for a centralised system with limited investment choices and customer service are as low as 0.15% of assets per year”, according to the general accounting office. And Shipman suggests that fees could be as low as 0.18-0.34% of assets over the first five years; in fact Vanguard’s S&P 500 index fund has an expense ratio of only 0.18%.
But even those who support Bush’s plan are concerned with the transitory costs. This is because a portion of payroll taxes would have to be diverted to the private accounts and the government would remain obliged to pay full benefits for those already retired. “A credible fix for Social Security’s long-term finances probably requires some mix of retirement-age shifts, payroll-tax increases, benefit-level changes or further government borrowing”, remarked the conservative Wall Street Journal. Diverting just two percentage points of payroll taxes would create a gap of up to $2 trillion over the first ten years, according to various projections. Former economic adviser Lawrence Lindsey favoured making up this gap with extra federal borrowing. Treasury officials and Bush’s Council of Economic Advisors were opposed. Since the president had ruled out higher tax boosts, the only alternative was to curb benefits, not a politically popular choice.

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