PRIVATIZATION, CONT’D

Last week this space examined what was wrong with the demands of social activists who see efforts to privatize Social Security as a chance to redistribute the nation’s wealth in a leftward direction more to their liking.

This week it’s time to discuss what’s right about the left.

If Social Security is partially privatized — that is, if individuals are allowed to invest part of their payroll taxes in self-directed vehicles that resemble individual retirement accounts — the financial services industry must shoulder major responsibilities. And rightly so. That’s because the industry also would reap major returns from managing hundreds of billions — someday trillions — of dollars in new accounts.

No privatization effort should pass Congress unless it includes these safeguards for the working poor:

* You gotta pay to play. The very small initial accounts of low-income workers must be administered at a minimal fee, even if the costs can’t be covered by the fee. It’s a reasonable demand, considering that the larger and faster-growing accounts of workers who aren’t poor will give service providers ample opportunity to make profits.

Consider it a temporary loss leader, because that small initial contribution will not remain small. If the self-directed contribution is set at 2% of pay, and only the employee’s contribution is included, the amount contributed to the Social Security IRA for a worker earning $15,000 per year will be only $300. A 100-basis-point fee, which is probably reasonable, will be only $3 per year. But if the employee continues to invest $300 each year and earns 8% per year, net of fees, the account will grow to more than $5,000 after 10 years, more than $16,000 after 20 years and more than $43,000 after 30 years (all figures before fees). At that point the 1% fee would be $430 per year — a tidy sum for the fund administrator.

* Safety first. The financial services industry must design and provide an array of investment vehicles that make sense for workers at all earnings levels. Some of this has already been done for the 401(k) industry.

* No sleaze. When it comes to their Social Security payroll taxes, unsophisticated investors must not be allowed to fall prey to unscrupulous operators and be pushed into unsuitable investments. Self-policing won’t be enough. Service providers will have to work with the government to narrowly define what can be sold to Social Security IRAs.

* No politics. So-called “social investments” approved (or, more likely, barred) by political interests — from big labor to anti-abortion groups — will only ensure scandal, corruption and lower returns.

* No hawking. The industry will have to develop marketing standards, for both the quality and the volume of advertising that each firm can use to encourage participants to switch from one product to another.

The government is unlikely to allow privatization of any part of Social Security without stringent safeguards. The financial services industry should work with Congress and the White House to develop those safeguards. Financial planners, who deal with individuals saving and investing for retirement every day, also will have especially useful insights to share.

Privatizing part of Social Security is an obvious opportunity, but it is an even greater opportunity for workers — all workers, even the lowest paid — to build nest eggs far greater than the current system provides. It is a chance for the financial services industry not just to increase its earnings, but to provide a socially responsible service.