As the December ’98 “White House Conference on Social Security” got under way, two men slipped into the meeting hall and took seats together in the very last row of the audience. They were Marc Lackritz, president of the Securities Industry Association (SIA), and Matthew Fink, president of the Investment Company Institute (ICI), representing investment banks, brokers and the mutual fund industry. Unobtrusively, they watched President Clinton, assorted members of Congress and a wide range of experts and interest groups debate the future of the $500-billion-a-year Social Security system.

An insistent part of the debate is a proposal to privatize one-sixth of the system, funneling at least $80 billion a year into privately held accounts that would invest in stocks, bonds, mutual funds and money-market accounts. Of that $80 billion, something like 5 percent would be eaten up in bureaucratic and administrative costs, investment and management fees, and enforcement and compliance costs, with financial-services companies and investment houses pocketing $1 billion or more of the $4 billion total. And that would be just the beginning, since, once privatization of Social Security began, pressure would grow over time to complete it. In all, trillions of dollars are up for grabs; already Social Security accounts for a larger portion of the federal budget than the Pentagon and will rise exponentially decade after decade.

In his State of the Union speech, President Clinton fired the first shot in the battle, proposing to use the projected budget surplus to bolster the existing Social Security system. He avoided support for the private accounts privatizers want but, in a nod to free-marketeers, proposed investing part of the system’s reserve funds in stocks and bonds and suggested a separate system of government-aided private accounts over and above Social Security.

That the partial dismantling of the crown jewel of Franklin Roosevelt’s New Deal is even on the table is due, in large part, to a sophisticated effort by Wall Street and its conservative allies in both political parties. Yet, like Lackritz and Fink, the financial-services industry–not only Wall Street but banks and insurance companies–is trying to keep out of sight. Fearful of being accused of trying to gorge itself, vulturelike, on the carcass of Social Security, the money men are instead maneuvering quietly, behind the scenes, to guide the debate over privatization. “Everybody perceives that we have an enormous self-interest here,” says Lackritz.

In reality, Wall Street’s fingerprints are everywhere. Some firms, like State Street Boston, PaineWebber (along with the ubiquitous Pete Peterson of the Blackstone Group) and the SIA, are frankly backing privatization; others, like Merrill Lynch, Fidelity, American Express and ICI, are operating more quietly, financing academic studies and providing technical expertise to Congress and the White House. And most important, since 1995 Wall Street has helped to shape the debate by supporting a series of think-tank blueprints that have now been adopted as revealed truth by the GOP and many middle-of-the-road Democrats, while seductively tempting the White House.

Donald Marron, the PaineWebber CEO, says he’ll be lobbying moderate Democrats to endorse the concepts contained in the leading such blueprint. Describing the plan as “the 2 percent solution,” Marron says “we can bring around almost anybody on this.”

As the 106th Congress begins its work, Social Security reformers have pushed the topic to first place on the agenda. Both President Clinton and the GOP say that fixing Social Security is the most important issue on Congress’s plate. The very fact that Social Security has assumed so prominent a position on Congress’s to-do list is a tribute to the power of the privatization lobby, since the ballyhooed crisis in the system will not occur until at least 2032.

When the battle does begin in earnest, both privatizers and Social Security traditionalists will bring enormous resources to bear. The AFL-CIO and scores of allied groups pledge an all-out effort to defend the system from attack, and the American Association of Retired Persons will plop its considerable weight down against privatization. “Our board is opposed to any carve-out,” says John Rother, the AARP’s political director, referring to privatization plans that would “carve out” part of the 12.4 percent employer-employee FICA contribution for private accounts. “This is the No. 1 issue for ’99.”

Four years ago, the idea that Social Security might be privatized was confined to a small coterie of conservative and libertarian ideologues, centered on a handful of Washington, DC, think tanks like the Cato Institute and the Heritage Foundation, along with the Dallas, Texas-based National Center on Policy Analysis. Leading the pack was Cato’s Project on Social Security Privatization, a high-powered task force that churned out a steady stream of policy papers and Congressional testimony and conducted background briefings for members of Congress and the Washington policy community. Financed by, among others, a handful of Wall Street donors–including Salomon Brothers, Prudential Securities, T. Rowe Price and the SIA–Cato recruited a team of executives to its advisory committee on Social Security privatization, with backing from American Express Financial Advisors and KPMG.

The project, which had a budget of $700,000 last year, is co-chaired by William Shipman, principal at State Street Global Advisors, part of State Street Boston, a huge financial-services company [see sidebar]; and José Piñera, who formerly served as minister of labor in Gen. Augusto Pinochet’s Chilean dictatorship and who engineered the privatization of that country’s public pension system.

More than any other entity, Cato deserves the credit for getting the Social Security privatization ball rolling. But for most in Congress, as well as a number of major players on Wall Street, Cato–which describes its own plan as “radical”–was too far out to attract much support. Its proposal for wholesale privatization of the system, financed by dramatic cuts in Social Security benefits and draconian reductions in other government spending, was seen as politically unpalatable, and it scared off many potential backers. According to Michael Tanner, Cato’s director of health and welfare studies, who oversees the Social Security privatization project, Cato tried but failed to garner the support of banks, stock and bond brokers, and other Wall Street firms. Julie Domenick, ICI’s executive vice president for public affairs, calls the Cato Institute “reactionary,” adding that ICI “made a specific decision not to give money to Cato.” Expressing similar caution, Robert Pozen, president of Fidelity Management and Research, says, “We don’t like the word ‘privatization,’ because it suggests the dismantling of the Social Security safety net.”

Yet by beating the drum so consistently Cato has helped move the debate far beyond where it was just a few years ago. “First we had the question of whether or not the system is in serious trouble,” says State Street’s Shipman. “That took awhile. Then it was, Should Social Security rely on the markets? That took a while, but there was an extraordinary shift about two years ago, and now everyone is talking about investing in the markets for Social Security.” Now, Shipman says, the question is not whether but how to utilize the private markets as part of Social Security reform.

The Cato Institute’s project is still going strong, with co-chairman Piñera prominently featured on a panel at the White House Social Security conference. (Eerily, even as Piñera spoke, British courts were struggling to decide whether to extradite General Pinochet to Spain for “crimes of genocide and terrorism.”) But the momentum started by Cato and its allies has been assumed by more mainstream players.

Most important is the National Commission on Retirement Policy, a project of the Center for Strategic and International Studies, a conservative Washington, DC, think tank. Founded in 1997, the commission included senior executives from Fidelity Investments, the parent firm of Fidelity Management, and Aetna, and was co-chaired by Marron of PaineWebber. With an overall budget of around $700,000, financed by PaineWebber, Fidelity, a number of Fortune 500 companies and a few leading foundations, including New York’s J.M. Kaplan Fund, the NCRP brought together four key Congressional players: from the Senate, Democrat John Breaux of Louisiana and Republican Judd Gregg of New Hampshire; from the House, the two chairmen of the House privatization caucus, Republican Jim Kolbe of Arizona and Democrat Charles Stenholm of Texas. According to Stenholm, the caucus has grown to include about seventy members.

Ed Lorenzen, Stenholm’s legislative assistant, says that Stenholm regards the NCRP as having “helped him think through some of the details of this, such as the costs of different options and the impact they might have. He ended up learning a lot.”

Also on the NCRP was Cato Institute adviser Mark Weinberger, an influential lobbyist with a firm called Washington Counsel. Among Weinberger’s present and former clients: Merrill Lynch; Goldman, Sachs; the Bond Market Association; and the powerful ICI. Weinberger pooh-poohs the idea that Wall Street is scheming to profit on Social Security privatization, calling it a myth manufactured by the media. “Besides,” he says, “I don’t think that the financial community speaks with one voice.” Many companies, he says, are concerned about alienating their clients, who, after all, might be offended by proposals to dismantle Social Security.

What’s important about the NCRP is that its proposal for partial privatization of Social Security, released last May, was immediately translated into credible, bipartisan legislation in both houses of Congress by Breaux, Gregg, Kolbe and Stenholm. “We have put our name on a proposal that uses private markets for 2 percent of what’s now going into Social Security,” says Stenholm. Lorenzen, his aide, adds that “the legislation that we introduced follows the recommendations of the commission as much as possible.” As with all plans for partial privatization, the NCRP’s would intensify the shortfall that Social Security faces in the next century by diverting one-sixth of the system’s funds into private accounts, thereby leaving even less money left over to pay for current retirees and the coming retirement of the Baby Boomers beginning in 2011. To pay for that shortfall, the NCRP proposes raising the retirement age to 70 (from the current 65, already slated to increase to 67) and instituting a sharp cut in Social Security benefits by adjusting downward the annual cost-of-living increase by 0.5 percent a year.

Part of the NCRP plan is constructed to deal with a major objection to Social Security privatization, namely, the staggering cost of administering tens of millions of private accounts that would contain only tiny amounts of money. Something like 30-35 million Americans, including part-time, temporary and low-wage employees, earn less than $10,000 a year. By putting aside 2 percent of wages, a person earning $5,000 would save just $100 in a private Social Security account and the $10-$20 cost of maintaining that account would eat up a significant chunk of the person’s savings. (Maintenance costs are relatively much higher for small accounts.)

To get around this problem, one recognized not only by critics of privatization but by many Wall Street experts who fret about having to manage so many small investors’ accounts, the NCRP proposes to bundle the small accounts into a single government-owned investing corporation that would do business with perhaps a dozen money-management firms, from Vanguard to Merrill Lynch to Chase Manhattan Bank, which would bid competitively to qualify. Though such an arrangement might be only marginally profitable for Wall Street, and then only for the handful of firms chosen to manage the government-supervised accounts, as the accounts grew, individual account holders might be offered the choice of setting up and managing their own accounts with private securities firms.

While the financial industry has been busy funding the theoretical underpinning for Social Security privatization, it has also continued its traditional heavy donations to political parties and campaigns. During the ’98 election cycle, securities and investment companies contributed more than $23 million, almost evenly divided between Republicans and Democrats. (In all, including insurance companies, banks, finance and real estate companies, more than $98 million was funneled into the 1997-98 election campaigns, both totals outpacing other industries’ contributions.) In addition, lobbying itself was big business for the securities and investment company sector; in 1997 alone, it spent more than $31 million on Washington lobbyists. Just four organizations accounted for nearly half that total: SIA, with $5 million in lobbying expenses; ICI, with $3.7 million; Merrill Lynch, with $2.9 million; and the Bond Market Association, with $2.4 million.

Of course, as powerful as this apparatus is, Wall Street has hardly begun to mobilize its troops for the hand-to-hand combat that will be required to succeed in privatizing Social Security. A survey of Washington lobbyists for securities and investment firms and their allies reveals that most, though not all, are content to keep their powder dry. Part of their motivation for waiting is that a highly visible campaign by the industry would provide the enemies of privatization with a juicy target. “I think they’ve got to walk a fine line,” says a Capitol Hill staffer working for Social Security privatization. “And I think that’s smart. But they’re on board.” A key Democratic staffer says, “Early on, ICI did go around. Their lobbyist, Mike Stern, was kind of feeling people out. But they’re not lobbying now.”

Indeed, two years ago Stern was actively engaged in trying to raise the profile of Social Security privatization on Capitol Hill, but he was reined in when articles began to appear highlighting ICI’s role. “The institute has no ongoing activities in regard to Social Security privatization,” says ICI spokesman John Collins. “And we are not salivating over the idea or anything like that.” But ICI is on record favoring at least some privatization and, says Collins, “If you allowed individual accounts at something like the 2 percent level that’s being talked about, it would be something that the institute would support.”

Don Marron, the PaineWebber CEO, is not shy about declaring his support for Social Security privatization. Citing the steady stream of members of Congress who make the pilgrimage up to New York to see him, Marron says, “We have someone in here almost every week.” According to PaineWebber, recently those visitors have included Democratic Senator Robert Kerrey of Nebraska, a leading advocate of privatization; Senate majority leader Trent Lott of Mississippi; Republican Senators Rick Santorum of Pennsylvania and Chuck Hagel of Nebraska; Republican Representative John Kasich of Ohio; and Democratic Representative Martin Frost of Texas.

And the company is not afraid to make the connection between policy and campaign contributions. “You know, New York City is the place they all come to raise money,” says a PaineWebber official. And when they do, they’re lobbied by the company before the check is handed over. “We see them when they come in with some fundraising project in mind. It’s a two-pronged thing–money and public policy. We’ll help with some dinner or some other event they are hosting.” On a typical New York trip, members of Congress will make a series of such visits. “There are six or eight companies involved,” says the PaineWebber official.

In 1997-98, PaineWebber’s PAC delivered more than $50,000 to Congressional candidates, including Breaux, Gregg and Stenholm. PaineWebber executives also gave $352,000 to federal candidates during the ’96 election cycle (’98 totals are not available yet), earning the company seventh place on a list of the Top 50 Individual Contributors compiled by the Center for Responsive Politics. Joining PaineWebber near the top were Merrill Lynch ($600,000, second place), Goldman, Sachs ($519,000, fourth place) and Bear, Stearns ($320,000, eighth place), with several top accounting firms, an insurance company and a leading lobbying firm rounding out the Top 10.

Marron of PaineWebber is especially concerned about moderate Democrats, since the GOP is solidly lined up in favor of individual accounts, called PSAs in the jargon of Washington, for “personal savings accounts” or “personal security accounts,” or PRAs, for “personal retirement accounts.” Not long ago, Al From, the head of the centrist Democratic Leadership Council, had lunch with Marron and another PaineWebber official. The DLC, whose purpose is to realign the Democratic Party away from its traditional alliance with the AFL-CIO, is strongly leaning toward NCRP-style privatization. The November/December 1998 issue of The New Democrat, the DLC’s bimonthly magazine, is filled with a series of pro-privatization stories under the heading “Less Than Secure: Rebuilding Social Security for the 21st Century”; it includes a piece by Senator Breaux outlining the commission’s proposals.

Even more forthright than Marron in lobbying for Social Security privatization is a brand-new coalition in Washington called the Alliance for Worker Retirement Security, which is expressly dedicated to free-market reform of Social Security. Launched last September with the backing of the National Association of Manufacturers, the alliance unites most of the business community in the nation’s capital, including the US Chamber of Commerce, the Business Roundtable, the National Federation of Independent Business and the National Retail Federation.

Like the NCRP, the alliance is a second-generation conceptual offspring of the Cato Institute, headed by former Cato staffer Leanne Abdnor. The chairman of its advisory board is former Congressman Tim Penny, a Democrat with close ties to the DLC who is also a member of Cato’s Social Security project. With a relatively small budget for ’99–just $500,000–the alliance is a pure lobbying organization, designed to coordinate pro-privatization forces on Capitol Hill and vis-à-vis the White House. Though members of the alliance take somewhat varying approaches, all are agreed on the need to privatize at least some portion of the 12.4 percent FICA contribution taken out of wages.

For the most part, the financial and investment industry has largely stayed out of the alliance. “I have not made a big push to get them on board because I’ve been told they’re not getting out front on this,” says Abdnor, though lately the powerful SIA opted to join. In December the alliance assembled an even broader group of associations, corporations, organizations and lobbyists into a coalition called “Campaign to Save and Strengthen Social Security.” Virtually the entire conservative movement showed up at a press conference organized by the alliance, from the National Taxpayers Union to Grover Norquist’s Americans for Tax Reform, and including a handful of ersatz senior citizens’ groups opposed to the AARP. A key participant is the American Legislative Exchange Council, a conservative group pushing privatization measures in state legislatures around the nation.

The interest of the National Association of Manufacturers in Social Security reform has dual origins, Abdnor says. One is quite prosaic: Big businesses simply dislike taxes and fear that, left unchecked, the Social Security system could command higher payroll taxes, including a bigger employer share. The other reason, she says, is more philosophical: By being compelled to acquire an investment portfolio, workers will find themselves with a vested interest in what happens on Wall Street. “Construction workers in Chile are reading the financial pages now,” she says. “There’ll be less of a mentality of us versus them.”

Though the alliance is strictly focused on Washington-based lobbying, its member organizations intend to unleash a nationwide educational effort on Social Security privatization, targeting shop-floor employees and staff with slick materials touting the benefits. Fifty thousand copies of an impressive four-color brochure have already been produced by the National Association of Manufacturers and Ernst & Young, complete with alarmist rhetoric (“The Social Security system is bankrupt”) and praising the “personal retirement account” as the solution.

Economic Security 2000, a little-known member of the alliance, is also stepping up its grassroots work. Begun on a shoestring in 1995 and jump-started by, among others, a $50,000 contribution from Richard Fisher, former CEO of Morgan Stanley, the organization now boasts a $1.7 million annual budget, a staff of twenty-six, active volunteers in eighty-eight cities and a dozen regional field coordinators, says executive director Hillary Beard. Backed by money from foundations and corporations like DuPont, Boeing and USX, ES2000 is organizing in the trenches on a state-by-state basis, building support for PSAs. Yet, says Beard, Wall Street has judiciously chosen not to support her organization. “We don’t have any Wall Street support, and it’s not for lack of trying,” she says. This spring, she says, ES2000 and Third Millennium, a conservative, self-styled Generation-X think tank, will convene a Washington, DC, forum financed by the J.M. Kaplan Fund to analyze exactly why Wall Street’s money men aren’t pouring money into organizations like theirs.

But at least some mutual fund money is finding its way to ES2000 and Third Millennium. In late January the two organizations are sponsoring something called the “Billion Byte March,” an odd nineties-style event that involves the coordinated delivery of pro-privatization e-mail messages to Congress, sorted by Congressional district from the Web site www.march.org. The event is partially co-chaired (and promoted) by the 100% No Load Mutual Fund Council, an organization representing thirty smaller mutual fund families.

Meanwhile, there is at least some jockeying behind the scenes to make sure that if any privatization reform does indeed take place, no one’s ox will be gored. In some circles there is consternation, for instance, that if a partially privatized system allows workers to set aside an additional 2 or 3 percent of their earnings–above the current 12.4 percent–it could steal billions of dollars’ worth of business away from companies that currently manage 401(k)-type pension plans. And there is also concern that the system might be designed to favor, for instance, stocks over bonds, or large mutual fund companies over small ones.

A spokesman for the Bond Market Association says a privatized system must not be allowed to funnel workers’ retirement money solely into stocks. “So,” he says, “we’re trying to insure that if Congress or the Administration does opt for privatization, that it include both stocks and bonds.” Similarly, the 100% No Load Mutual Fund Council wants to make sure that whatever happens, the smaller funds aren’t excluded. Since many of the new accounts would be small (as little as $100-$200 a year), no-load funds, which cost less for investors, would be perfect, says the council’s executive director, Tad Douglas. “Anyway,” he says, “the large mutual fund companies aren’t interested in small investors like these.”

In the end, if anything does happen, it will be a compromise between what the privatizers want and Bill Clinton’s carefully crafted plan. Such a compromise could prove difficult or impossible to achieve. Virtually all of the Republican Party is lined up behind partial privatization–indeed, a central part of the GOP’s response to the State of the Union was the need for private accounts carved out of Social Security. And a number of moderate Democrats are on board. Yet that’s not enough: Social Security cannot be reorganized without strong bipartisan support. Moreover, if partial privatization is to happen, Clinton will have to make an irreparable break with the AFL-CIO, since labor will never surrender on any carve-out of Social Security money. Right now, says an insider, many of Clinton’s key economic advisers are leaning toward support for partial privatization, but the White House’s political gurus, including those advising Vice President Gore, are skeptical. “And,” he says, “as of today the political people are in control.”

That was evident in the State of the Union address, in which Clinton mostly hewed to Social Security orthodoxy while trying to co-opt the GOP by backing some market investments and a system of private accounts added onto, not carved out of, Social Security. In so doing, he has tossed the ball to the Republicans, for whom it is a tricky play–one misstep and the Democrats have a slam-dunk issue for 2000. The Republicans could take Clinton’s refusal to explicitly condemn privatization as a signal to push ahead–and then find themselves accused of trying to dismantle Social Security. Yet while ruling out “radical” privatization but refusing to be more specific, aides like Gene Sperling and Social Security Commissioner Ken Apfel do seem to be leaving the door ajar.

Of course, it’s always a safe bet that Congress will end up doing nothing, since, crisis or no, the problem can wait. But the privatizers see 1999 as their golden moment.