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False Attacks Over ‘Windfalls’ to Wall Street

We find that brokers netted only 16 cents in fees to manage a $10,000 retirement account under the federal retirement system on which Bush is modeling his private Social Security accounts.


New information turned up by FactCheck.org shows that the type of private Social Security accounts being proposed by President Bush would yield very little profit to the securities industry, contrary to persistent claims of a potentially huge “windfall” to Wall Street.

What we have discovered is that the model for Bush’s accounts — the Federal Thrift Savings Plan for federal workers — actually paid securities firms a net total of only 16 cents for every $10,000 in workers accounts. The TSP had refused to make that information public — until now. It shows that fees actually being paid to Wall Street are hundreds of times smaller than some critics had assumed.

For that reason and others we find that ads run in Louisiana by the liberal Democratic group Campaign for America’s Future are grossly misleading. The group is accusing Republican Rep. James McCrery, who is chairman of the Social Security subcommittee and a supporter of Bush’s private accounts, of “corruption” for accepting campaign donations from Wall Street, which it falsely claims will “profit most” from private accounts.


The “windfall to Wall Street” argument rests on the idea that securities firms stand to reap hundreds of billions of dollars in fees from managing private Social Security accounts. What we present here is new evidence showing that’s false.

The claim was made most recently in a series of ads by the Campaign for America’s Future, which ran newspaper ads in Louisiana attacking Rep. McCrery Feb. 24 and Feb. 27, and launched a similar TV ad Feb. 28.

In summary, the ads accused the congressman of a corrupt bargain with Wall Street, which the newspaper ads claimed would reap $279 billion from private accounts.

Campaign For America’s Future Ad: “Snow Job”

Announcer: Typical Washington Snow Job. Congressman McCrery wants to privatize Social Security and cut our guaranteed benefits — after taking campaign money from the very Wall Street firms that’d profit from privatization.
(On screen: McCrery received nearly $200,000 from Securities and Banking Firms.)
Now, Treasury Secretary Snow, a former big time CEO, is coming down here to defend him? You know, maybe Jim McCrery’s been in Washington so long, he forgot who he’s working for.

Paid for by Campaign for America’s Future.

The group’s TV ad doesn’t go quite as far — just saying McCrery took campaign donations from “the very Wall Street firms that’d profit from privatization.”

(The ad was later pulled off the air after station managers received a formal objection from McCrery claiming it falsely accuses him of supporting “privatization,” a term he says misrepresents his support for “personal” accounts within the Social Security system. See “supporting documents” to view the full-text of his letter. Update, March 6: CAF’s ad was off the air only about 24 hours, according to news accounts. It was reinstated the evening of March 2.)

How Much to ‘Wall Street’?

Some critics of private accounts have argued for years that they would create a large business opportunity for the securities industry, but earlier studies rested on the assumption that accounts would be allowed to invest in a large number of actively managed funds offered by Wall Street. That turned out to be a false assumption. Bush is explicitly proposing accounts that would be administered by the federal government, and which would offer only a handful of passively managed “index” funds, similar to the Federal Thrift Savings Plan.

How Accounts Would Work

(Background briefing given to White House reporters Feb. 2, on condition that the official not be named)

“Senior Administration Official”: Specifically, the investment options that individuals would have would be somewhat similar to the Thrift Savings Plan. In the Thrift Savings Plan, individuals are given presently a choice of five funds. . . . (It) has the virtue of offering very low administrative costs. . .For the types of accounts I’ve just described, we have an estimate from the Social Security actuary of 30 basis points….

One specification I would give about that is that the vast majority of those administrative expenses are actually for things like record-keeping, keeping track of the decisions made by individuals, and the amounts of contributions….And those are, or course, transactions that would be handled by the…administering government entity, as opposed to be handled by an outside entity, or a Wall Street firm….

(For full text of briefing see “supporting documents.”)

The TSP allows federal employees to set aside retirement savings in tax-deferred accounts where workers may choose among five broadly diversified funds of stocks, bonds or government securities. “Index” funds are quite cheap to run because the securities they buy are chosen by a formula, to imitate broad stock-market indexes such as the Standard & Poor’s 500-stock index.

We looked closely at how much the TSP actually pays the securities industry to manage those funds — and it turns out to be astonishingly little. According to the most recent audited financial statement of the Federal Retirement Thrift Savings Investment Board, the TSP had $129 billion in assets in 2003, and paid just over $3.7 million in “Investment Expenses.” The statement also shows that those fees were partially offset by $1.6 million in “asset manager rebates” paid to the TSP, reducing the net total paid to Wall Street to just under $2.1 million. That works out to just 16 pennies for every $10,000 in assets. (For a copy of the financial statement with the relevant items highlighted, see “supporting documents.”)

Although the TSP had previously refused to say how much it paid financial companies to manage the assets of the plan, once we pointed out the $3.7 million item in the TSP’s public financial statement, a TSP spokesman confirmed that figure as the total amount paid to Wall Street. The spokesman also confirmed that the $1.6 million in rebates are used to offset those fees and reduce the total net expense.

The money is paid to (and the rebates are received from) Barclays Global Investors to manage four of the five mutual funds. The fifth fund is made up entirely of special federal government securities that can’t be bought or sold on the open market, and is managed entirely by federal employees. Barclays won a contract to manage the four funds through competitive bidding. A spokesman for Barclays didn’t dispute our finding. “We can’t confirm it for competitive reasons,” said Tom Taggart, managing director of Barclays. But he added, “We’re good at managing large pools of money cost-effectively.” He said Barclays has $1.7 trillion in assets under management, and its clients include 65 of the 100 largest pension funds in the world.

How Much Profit?

It has always been known that the TSP is extremely efficient as a manager of employees’ savings. Total costs of TSP accounts run about 6 basis points per year — which is another way of saying 6/100ths of one percent per year of total assets being managed. That’s far less than the typical mutual fund available on the private market. The TSP had been reluctant to say publicly how much of that 6 basis points went to the federal government to handle the record-keeping, postage, and other administrative costs, and how much went to the securities industry to set up and manage the stock and bond funds. As we discovered, TSP managers have driven a hard bargain with Wall Street, which is getting only a tiny fraction of that 6 basis points. On a $10,000 account, it works out to about $5.80 to the federal government for record-keeping and general administration, and as we said before, only 16 cents to Barclays.

Barclays actually makes more than the 16 cents paid by the TSP, because Barclays also generates income from lending securities owned by the TSP funds to other brokers. That income doesn’t come at the expense of the TSP or federal workers, and in fact is shared with the TSP through the rebates we mentioned earlier. How much is Barclay’s making? Neither Barclays nor the TSP would tell us how they divide this securities lending income, but a 50-50 split isn’t uncommon in the pension-fund industry. Our best guess is that Barclays is making no more than 54 cents per year on a $10,000 account, even assuming a 50-50 split and further assuming that the TSP applies half its share to reduce its operating expenses and the other half to bolster the value of workers’ accounts.

Based on all that, FactCheck.org concludes that Wall Street is likely to squeeze out very little profit in private accounts as currently described by the Bush administration. And even economist Austan Goolsbee — a prominent critic of private accounts — tells us “your statement is fair” provided Bush sticks to the TSP model.

Goolsbee cautions that private accounts could still lead to “the possibility of huge profits being on the table” for Wall Street should Congress allow owners of private accounts to choose from a wide variety of actively managed funds offered by Wall Street. And we agree with that — fees for such actively managed funds would necessarily be higher. But Bush isn’t proposing to allow workers to choose actively managed funds, probably to avoid the very criticism Goolsbee and others raise.

Goolsbee, a professor at the University of Chicago’s Graduate School of Business, wrote a paper in September 2004 that stated private accounts would be “by far the largest windfall for financial managers in American financial history.” Goolsbee’s paper assumed that accounts containing more than $5,000 could be handled by private brokerages, but what Bush later proposed wouldn’t allow for that. Goolsbee also projected that fees to Wall Street would average 80 basis points — or $80 a year on a $10,000 account — a figure 493 times higher than what turns out to be the actual rate paid to Barclays by the TSP.

The Tune of $279 Billion

The Campaign for America’s Future repeats the bogus assumptions about Wall Street profits in newspaper ads that claim the securities industry will benefit “to the tune of $279 billion” (See “supporting documents” for enlarged image.)

This particular figure comes from a report published by the Securities Industry Administration (SIA), the financial industry’s main lobbying group, disputing Prof. Goolsbee’s estimate under the 80 basis-point assumption. However, what Campaign for America’s Future neglects to mention in their ad is that SIA specifically states the $279 billion estimate applies to a “sophisticated” model of private accounts where workers “can choose to invest in a wider range of actively managed funds.” And as we’ve said already, this is explicitly contrary to the Bush Administration’s proposal for the TSP model of broad-based index funds — a plan that yields minimal profits to Wall Street firms.

The figure that the Campaign for America should have used — from the same SIA study — is $39 billion (over 75 years). That’s the amount that the SIA study said would accrue to the securities industry under a plan like the one Bush is actually proposing, allowing workers to choose from only a few passively managed funds. But even that figure is way too high, because it is based on an assumption that fees paid to Wall Street would average .035% of assets — or $3.50 on a $10,000 account. As we’ve shown, that figure turns out to be 22 times higher than the actual net rate paid to Barclays to manage the TSP accounts. The hard bargain driven by the TSP apparently wasn’t known even by the securities industry’s own lobby.

Cost to Workers

The total cost to administer private Social Security accounts under Bush’s proposal is bound to be far higher than the 6 basis points that federal workers pay under the TSP. That’s mainly because federal payrolls are highly centralized and computerized, and allow efficient administration of the payroll deductions and reporting involved. Expanding such a system to cover millions of small businesses and self-employed individuals, most of them reporting to the government on error-prone paper forms, would obviously run up the costs of administration. In fact, the Social Security Administration’s Chief Actuary estimates that the total cost of administering private accounts would be about 30 basis point — or $30 per year for every $10,000 invested. That’s five times higher than the total cost of the TSP, to be sure. But it would still be a far better deal than the fees charged by most privately marketed mutual funds, and it wouldn’t mean any higher fees for Wall Street.

The higher cost of administration for Social Security accounts would be for a larger federal bureaucracy to handle the paperwork — not for securities firms to manage the funds. In fact, fees to the securities industry could quite possibly be even lower (in percentage terms) for the funds available under Social Security accounts than for the funds available under the Thrift Savings Plan. That’s because there are enormous economies of scale in managing index funds — the more money being managed, the lower the cost.

‘We’re Agnostic’

Interestingly, Barclays isn’t pushing for private Social Security accounts even though it is one of the four or five investment firms that are positioned to profit from the sort of accounts being proposed by Bush — firms that specialize in large index funds for the pension industry. “We’re agnostic about Social Security reform,” managing director Taggart told us. In fact, he said, “We don’t have lobbyists.”

FactCheck.org also takes no position on whether private accounts (or “personal” accounts, as the President and Rep. McCrery prefer to call them) are a good idea or a bad idea. But the claim that they would be a bonanza for Wall Street is one that just doesn’t square with the facts.

Revenue vs. Profit

Update, March 6: Our article may have left readers confused about the difference between revenues and profits. The 16 cents per $10,000 we mention is revenue — the net fees charged by Barclays Global Investors to manage TSP index funds. Barclay’s profit — if any — would be less. Profit, of course, is what a company has left after deducting its cost of doing business from what it takes in.

We have no way of knowing how much profit Barclays makes specifically on its contract to manage funds for the TSP. According to the most recent annual report of Barclays PLC, (see page 28) its Barclays Global Investment unit had an overall profit margin before taxes of 39 percent. That implies an actual profit to Barclays of 6 cents on the fees it charges the TSP. Factoring in additional revenue that Barclays gains from lending securities in TSP accounts, our best estimate is that total revenue to Barclays from the TSP is no more than 54 cents. Assuming a 39% profit margin, that would put the upper limit of Barclay’s profit at 21 cents for every $10,000 in TSP accounts.



Watch Campaign For America’s Future Ad: “Snow Job”


Supporting Documents

View Audited Financial Statement of Thrift Savings Fund Showing “Investment Expenses” of $3.7 million, “Rebates” of $1.6 million, and Assets of $129 billion for 2003

View Rep. McCrery’s Letter to Television Stations

View Campaign for America’s Future Newspaper Ad

View Full Text of Feb. 2 White House Briefing on the President’s Social Security Proposal


“Financial Statements of the Thrift Savings Fund – 2003 and 2002,” Independent Auditors Report  to the Federal Retirement Thrift Investment Board; 28 April 2004.

Austan Goolsbee, “The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers,” University of Chicago; Sept. 2004.

Rob Mills, “Individual Social Security Accounts: No Free Lunch for Wall Street,” SIA Research Reports, Volume V No. 13 ; 8 December 2004.

Francis McCabe, “Ad attacking McCrery back on airwaves,” The Times (Shreveport, LA), 4 March 2005: 1B.