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Privatizing Social Security Could Boost Index Funds

An overhaul of the nation's Social Security plan, one of the big-ticket items of newly reelected President Bush's second-term agenda, could create a windfall for mutual fund firms specializing in index funds, according to industry insiders.

Privatization, which would give investors the choice of how to invest their Social Security money, may not create the huge industry-wide boom that some might expect, however, as the government would most likely restrict investors' choices to large, well-diversified index funds. And the balances of these accounts would most likely be fairly small.

"Many participants in the Social Security system may have little or no experience with long-term investing," admitted the Investment Company Institute on its Web site. "A significant public education campaign" would be necessary for privatization to be effective, the ICI added.

Thus, safer mutual funds that track broad indexes like the S&P 500, namely index funds, could help less-educated investors dip into the market with less risk. Fund companies that offer a number of index funds, namely Vanguard, Barclay's and State Street Corp, would probably see the most positive immediate impact of privatized Social Security.