For months (years?), Democrats have claimed that the effort to add private accounts to Social Security is an elaborate scheme to enrich Wall Street donors. A perfect example is DNC chair Terry McAuliffe's recent statement referring to private accounts as the Republican "plan to cut benefits and funnel Social Security money to their Wall Street friends." So this news must have come as quite a shocker:
Bush’s advisers have settled on a proposal for structuring the personal accounts to resemble the Thrift Savings Plan, a tax-deferred retirement investment plan for federal workers similar to a 401(k) plan.
...In the Thrift Savings Plan, federal employees have five investment options, including government and corporate bond funds, a stock fund that tracks the S&P 500, an international fund and other stock funds.
...The government would be responsible for keeping track of how much money was in each worker’s account and give the lump sums to a financial services company to invest, a mechanism aimed at keeping administrative fees low, officials said.
That would mean only a limited profit potential for Wall Street. More money might be available for industry if a second tier of investments were permitted.
There may be cronyism in the Bush administration, but ideology and political victory come first. And in this case, the White House is making the right choice. While private accounts are likely to be implemented badly, TSP is the best model to use because lower fees mean increased returns.
(Note: As I've said before, if private accounts are created, I believe that Social Security will be forced to offer more investment choices with higher fees over time. But the cronyism story is exaggerated and implausible.)