Bankers seek their slice of Social Security

A key banking lobby has appealed to the White House and select members of Congress in an effort to secure a portion of Social Security investment, should personal savings accounts be included in any major reform legislation.

America’s Community Bankers (ACB) hopes that CDs and other higher-yield, federally insured savings products will be included as investment options if Congress creates personal savings accounts as part of a Social Security overhaul.
A key banking lobby has appealed to the White House and select members of Congress in an effort to secure a portion of Social Security investment, should personal savings accounts be included in any major reform legislation.

America’s Community Bankers (ACB) hopes that CDs and other higher-yield, federally insured savings products will be included as investment options if Congress creates personal savings accounts as part of a Social Security overhaul.
 
RAHIEM

Most reform legislation introduced in the last Congress listed some combination of stocks and bonds as the preferred investment vehicle for those savings accounts. This time around, the banks would like that menu to include some of their products — such as CDs, which grow at a slightly slower rate than bonds but are federally insured.

“As we begin this debate, let’s make sure all the players are at the table,” said Diane Casey-Landry, ACB’s president and CEO. “We want to be a part of this.”

Social Security reform presents massive political challenges to the White House and Republicans in Congress, among the most formidable being the controversial creation of personal savings accounts. And no fight on K Street will rival the lobbying scrum over who controls the money and how that money is invested.

Banks, bond traders and investment houses are initially expected to stand behind President Bush in his push to divert a portion of payroll taxes to private markets — although the latter two groups have been more notable for their silence on the topic than for their advocacy of the president’s agenda. But if the White House is successful, many expect the lobbies then to square off in a fight over who controls those funds.

Banks argue that their investment products, most of which are insured by the Federal Deposit Insurance Corp. (FDIC), present a no-risk alternative to workers who hesitate to divert any portion of their payroll taxes to the equity or bond markets.

Bankers maintain that these no-risk investments allow the White House and congressional Republicans necessary political cover from their critics, who argue that exposing these funds to market risks will imperil the system and create winners and losers in the now 70-year-old retirement program.

“This is not the highest yielding place for your money to be,” Casey-Landry said. “We can’t compete with equities. But it’s a trade-off. The question is, what is your risk tolerance?”

ACB represents community banks of all sizes, most of which have combined assets of less than $1 billion. It includes 1,200 member organizations.

The American Bankers Association (ABA) has also reached out to the White House and key members of Congress to ensure that its members will also be able to participate in any personal savings accounts. It has also proposed allowing workers to establish these accounts through their pre-existing bank accounts.

“We believe the more institutions that participate, the better,” said Floyd Stoner, the ABA’s executive director of congressional relations.

Because the details of Social Security reform remain hazy, with Congress awaiting recommendations from the White House, the banks have not yet worked out the details of these savings products. Their lobbyists are only hoping to secure a seat at the negotiating table should Congress act on Bush’s call for reform.

Casey-Landry and her colleagues at ACB were encouraged when Bush mentioned “compounding interest” at least twice during a Social Security forum in Washington last week. In the past, the president has discussed improving the rate of return on Social Security savings in vague terms, but Casey-Landry said she hoped that his recent remarks were a direct nod to the banks.

The White House has just begun rallying support on K Street for major Social Security reform. It already faces staunch opposition from AARP, which launched a two-week, $5 million advertising campaign earlier this month condemning the president’s effort to create private Social Security accounts.

The financial-services lobby could be an important ally as the administration seeks funds to combat negative campaigns by AARP and congressional Democrats. House Minority Leader Nancy Pelosi (D-Calif.) has been criticizing the president’s reform agenda in daily press releases.

For banks, personal savings accounts not only will boost revenue but also have the potential to create a new pool of young customers whom the banks can then tap for other products, such as checking accounts and home loans. Those revenue increases, if large enough, could also have the effect of lowering the mortgage rates on those loans, Casey-Landry said.

It is still too soon to determine what benefit, if any, the banks and Wall Street stand to gain if the administration successfully creates personal savings accounts as part of the Social Security system. Some have argued that the fees and increased cash flow would be a minimal percentage of the overall market, giving these financial institutions little incentive to get involved in this political fight. But banks see any revenue from personal savings accounts as a guaranteed long-term stream of capital.

The banks are also concerned that the president will model personal savings accounts on the Thrift Savings Plan, a retirement fund for more than 3.4 million federal employees that had a market value of $143 billion as of last October. The plan is broken up into four index funds and a money-market account that is managed by the Federal Retirement Thrift Savings Board. The four index funds are managed by Barclays Bank, which won the concession through competitive bidding when the plan was created in 1986. Banks don’t want a single entity controlling the funds — and earning the fees — when it comes to personal savings accounts.

This is not the first time that ACB has pitched the idea of investing Social Security funds into private market accounts, but it believes the president will be much more dedicated to reform during his second term. ACB also has full support from its member banks.

“It’s time to move on this,” Casey-Landry said. “We’re getting the message loud and clear that [our members] want to be a part of it.”