Banks and other financial institutions - especially money managers - stand to gain tremendously from the flood of cash that would need to be invested should the Social Security system be privatized.

So says William G. Shipman, a principal at State Street Global Advisors, the investment management unit of State Street Boston Corp.

A frequent lecturer on the future of the Social Security system, Mr. Shipman has co-authored - with State Street chief executive Marshall Carter - a soon-to-be-published book on privatizing public pension plans. In an interview he discussed some of the main points of that book, including why he believes the current system must be changed.

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Why should the Social Security System be privatized?

SHIPMAN: The system is unsustainable the way that it is structured now. It's based on demographic models that are outdated and unrealistic.

The number of people working and paying into the system is shrinking compared to the number of retirees that are drawing benefits.

For example, from 1940 to 1995, life expectancy in the U.S. increased 12 years. That's 144 more monthly Social Security checks per person solely because of an increase in life expectancy.

At the same time, the birth rate has decreased in the U.S., so there are fewer people to be taxed and to pay the benefits for people that are living longer.

In 1950 there were 16 workers paying Social Security taxes for each retiree receiving benefits. Today there are only three workers per retiree. In 2025 there will be only two workers for every retiree and it goes down from there.

Should banks care whether the system is privatized?

SHIPMAN: If the system were to be reformed, there would be an increase in assets and wealth, because of savings and investing.

I estimate that across the world there could be an increase between $10 trillion and $15 trillion - we're talking about doubling the value of equities in the world.

All financial firms, money managers, banks, and insurance firms will compete vigorously to manage this money, provide custody, distribute checks, or do all the necessary work to distribute the money.

What should banks do to prepare?

SHIPMAN: Banks need to connect more closely with customers, because privatization will be an individual choice. A person will be able to choose between the private and the public system, and they will also choose who will manage their money.

So the firms that will win are those that have brand name awareness, have developed trust, and have the goods and services. For instance, banks need to have in place the investment vehicles, such as mutual funds, and the software so that individuals can under the retirement issue.

Banks, certainly as well as anybody, have an opportunity to handle a significant portion of the wealth. Probably more than other institutions, banks are in touch with individuals through mortgages, time deposits, and auto loans, etc., and they have a huge retail customer base.

Are banks positioning themselves to take advantage of privatization?

SHIPMAN: Very few are at the moment, because the awareness of this issue and the opportunities are quite new. I'd say it really hasn't come to attention until this year.

What are some of the arguments against privatizing the system?

SHIPMAN: The main one is that the markets will not provide the protection of that governments do. The markets are risky and volatile, but let's put this in perspective.

An individual entering the labor force today will get a zero return on their contribution into the system. They will receive benefits roughly equal to what they put in.

If you look at stock market data from 1926 to 1995 and you look for the worst 20 consecutive years, the mean annual return is not zero, it's 3.1%. If you look for the worst 30 consecutive years it's 8.5%. The chances that you'll get a zero return from the stock market during one's working career is slim - at least it's never happened in the history of the U.S.

How soon could we see Social Security privatized?

SHIPMAN: I think that within three years we may see reform. The issue will move very rapidly because people in this country want to see it, and it will probably become a significant issue after the election.

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