The White House held a two-day conference on Social Security reform last week, teeing it up as one of the top priorities for the new Congress when it convenes in January.

With bipartisan encouragement, the Clinton administration signaled that it would consider letting Social Security funds be invested in the stock market to prevent the government retirement program's looming financial crisis.

"There is a growing consensus, which the President is a part of, that we do need the type of investment options that would bring higher returns to Social Security," Gene Sperling, director of the National Economic Council, said Wednesday. "He (Clinton) certainly seems to be leaning that way."

That is music to the ears of industry trade associations such as the American Bankers Association and the Securities Industry Association. Each group last week strongly endorsed establishment of personal savings accounts that would let American workers invest Social Security benefits to expand their government nest eggs.

"We need to create incentive for savings and wealth accumulation," said ABA chief economist James Chesson. "The personal savings account provides those."

Both groups strongly emphasized that individuals-not the government- should make investment decisions.

Letting government have investment authority would be one of the "scariest possibilities," Mr. Chesson said. "If you are the government managing this, you have incentives that are more political than economic." For instance, the government might refuse to invest in tobacco companies, polluters, or foreign firms even if they were wise purchases.

Mr. Sperling said President Clinton was "open-minded" on this question but predicted it would be "the single most contentious issue."

Everyone agrees that Social Security must be fixed, and most politicians dismiss tax increases and benefits cuts as Band-Aid solutions. Expenses of the Social Security trust funds, which have nearly $800 billion of assets, start surpassing tax revenues in 2013, shortly after baby boomers begin hitting retirement age. Insolvency is projected in 2032.

Government officials are at odds over personal savings accounts. Federal Reserve Board Governor Edward M. Gramlich favors mandatory, self-managed accounts. But Securities and Exchange Commission Chairman Arthur Levitt recently warned about problems faced by novice investors, costly transaction fees, and political interference in securities markets. Treasury Secretary Robert E. Rubin has not expressed an opinion yet.

Incoming Senate Banking Committee Chairman Phil Gramm-who favors personal savings accounts-might hold oversight hearings on the matter. Any Senate legislation would originate in the Finance Committee, however.

Depending on how the system is revamped, bank industry officials said, Social Security reform could offer new business opportunities. Banks could sell traditional or mutual fund products to American workers or could win contracts to manage accounts for the government. "A bank traditionally has been a vehicle that Americans turn to because of the trust, the advice, and the cost-effectiveness of their products and services," said F. Gregory Ahern, senior vice president for State Street Corp., Boston.

Restructuring Social Security not only would benefit big banks and Wall Street firms but could create a new stream of long-term funds for deposit- thirsty community banks.

"You could open the door to a new savings vehicle where funds could be kept in Main Street institutions," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.