Last year's presidential campaign in the United States catapulted Social Security reform—once known as the "third rail" of the country's politics because nobody dared touch it—to the top of the political agenda. Many proposals, including those put forward by President George W. Bush and former Vice President Al Gore last autumn, had at their center the idea of creating private Social Security accounts held in financial institutions and invested in public markets. Reform of the system, with its huge tax revenues of $500 billion a year, is now among the Bush administration's top legislative priorities.

This is a great opportunity for financial institutions—or is it?¹ Some of them should look more closely at the potential impact of creating large volumes of small private accounts. Brokerage houses, retail banks, insurance companies, and mutual-fund managers could all be affected in different ways. The size of accounts, the guarantees required for them, the way they are administered, what investment products are allowed or disallowed—any of these things could turn private Social Security accounts into money losers. And if institutions wait to see how reform takes shape before considering its implications, they will forfeit the opportunity to prepare for it and to...