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WALL STREET TO WASHINGTON:
SOCIAL SECURITY PRIVATIZATION WOULD
ENDANGER AMERICANS' RETIREMENT SECURITY

Wyden joins financial experts in cautioning against diverting payroll taxes
to stock market in Social Security scheme

 

April 25, 2005

New York, NY – Today, U.S. Senator Ron Wyden (D-Ore.) joined members of Wall Street’s financial services industry as they caution Congress against the privatization of Social Security. Financial leaders - including rising stars on Wall Street - unveiled a letter to Senate Majority Leader Bill Frist (R-Tenn.) and Senate Democratic Leader Harry Reid (D-Nev.) in which they detail the significant financial risks for individual Americans if Federal payroll taxes are diverted from Social Security into the stock market - and reiterate that private accounts will do nothing to keep the program solvent for future generations. Wyden was joined by Senators Hillary Clinton (D-N.Y.) and Chuck Schumer (D-N.Y.) at the event today.

“When the Finance Committee began looking at Social Security, I assumed there would be automatic support on Wall Street for the President's private accounts proposal - but instead of rave reviews I kept hearing reservations from market leaders,” said Senator Wyden. “Congress should take this good financial advice and reject schemes that would make Social Security less secure and no more solvent than it is today.”

Two of these Wall Street experts spoke at the event today: David Shaw, Founder and Chairman of D. E. Shaw & Co., Inc. and a chief architect of the letter, and Ben Appen, a Partner at private investment firm Magnitude Capital.

“On Wall Street, the biggest mistake you can make is to risk what you can't afford to lose. The President wants millions of Americans to take risks with their minimum retirement security. It's a bad trade for America and we can not let it happen,” Appen said.

The letter from Wall Street experts expresses serious reservations about the President's plan to privatize Social Security. The more than 40 signers underscore that they “find no reason to believe that privatization would address current concerns regarding the long term stability of the Social Security system. Although the fee income associated with managing millions of new private accounts might well represent a windfall for those of us who work on Wall Street, we cannot in good conscience recommend privatization as a means of protecting the financial security of American retirees or controlling the government expenditures required to provide a given level of benefits.”

On April 26th, the Senate will begin hearings on the President’s plan, following a 60-day tour by administration officials that have revealed deep misgivings about the President’s plan across the country.

Senator Wyden today reemphasized that Social Security should be strengthened for the long term, beginning with shoring up the Social Security Trust Fund.

[The text of the letter follows]

 

April 25, 2005

Dear Leaders Frist and Reid:

We are writing to express our serious reservations regarding the President’s proposal for the privatization of Social Security. While we are strongly supportive of efforts to ensure the long-term solvency of the Social Security system, we find little evidence to suggest that privatization would help to achieve this goal.

Proponents of privatization have argued that redirecting a portion of Social Security payroll taxes into private investment accounts would allow investors to increase the ultimate value of their retirement savings by investing in equity securities. While this might be the case for some individuals under certain market circumstances, others, retiring at different times under different market conditions, might suffer the loss of a significant fraction of their retirement income due to the unpredictable nature and timing of the stock market. Although an investor whose minimal retirement needs have already been met may well wish to include a substantial equity component within his or her remaining investment portfolio, the redirection of Social Security funds toward riskier asset classes could jeopardize the system’s traditional role as a “safety net” for all American workers.

Even if we ignore the issue of risk and assume a higher rate of return for equities, the redirection of funds from the Social Security system to private investment accounts cannot be expected to help address any future mismatch between the benefits paid to retirees and the revenues allocated for the provision of such benefits. After taking into consideration the effects of transition-related federal borrowing, and in the absence of separate policy changes that, for example, increase the national savings rate or cause capital to be allocated more efficiently, privatization would have no net effect on the amount of capital available to the nation’s economy, on the aggregate net worth of its citizens, or on the cost of its retirement programs. The adoption of private investment accounts would result in only a reallocation of risk and returns, and would not lead to the creation of any new wealth that might be used to protect the benefits received by future retirees or reduce the net cost of providing such benefits.

In short, we find no reason to believe that privatization would address current concerns regarding the long-term stability of the Social Security system. Although the fee income associated with managing millions of new private accounts might well represent a windfall for those of us who work on Wall Street, we cannot in good conscience recommend privatization as a means of protecting the financial security of American retirees or controlling the government expenditures required to provide a given level of benefits.

Benjamin S. Appen
Charles Ardai
Theodore Aronson
Trey Beck
John Bingaman
Randall Blumenthal
Lisa Caputo
Jerry Colonna
Evan Dick
Anne Dinning
Glenn Dubin
Jonathan Fassberg
David B. Fink
Bill Hambrecht
Bob Harrison
Tom Hirschfeld
Michael Joseph
Mark Jurish
Scott Kalb
Bob Katz
Kathleen Kelley
Marshall Kiev
Andrew Klein
Orin S. Kramer
Leslie Lake
Marc Lasry
Dan Levinson
Jennifer Murray
Daniel G. Neidich
Hassan Nemazee
Dan O'Keefe
Alan Patricof
Nancy Pfund
Steven Rattner
Sandy Robertson
Barry Rosenstein
Lou Salkind
David Shaw
Dinakar Singh
George Soros
Aaron Sosnick
Michael Spalter
Peter Stamos
Adam Stauffer
Max Stone
Donald Sussman
James Whitehead

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