GAO Report Shows Administrative Costs Of Individual Social Security Accounts Could Be As Low As 1/10 Of 1%

Dallas (July 19, 1999) - One of the main criticisms of allowing individuals to invest a portion of their payroll tax dollars into private savings accounts for Social Security has been that the cost for administering such a program would be too high. Not so, according to a recently released General Accounting Office (GAO) report requested by Rep. Charles Rangle (D-NY).

The report, Social Security Reform: Administrative Costs for Individual Accounts Depend on System Design, estimates that if the costs of administering similar existing structures, such as employer-sponsored 401(K) plans were to carry over to a system of private accounts, the cost of administering the program could be as low as one-tenth of one percent.

"This report confirms the administrative costs can be minimal and therefore well worth the large potential benefits from investing privately," noted NCPA President John C. Goodman.

The GAO report notes that "State Street Corporation, a private financial services company, provided the most detailed analysis of costs per administrative function based on known costs."

According to the State Street Corporation estimates which was published by the NCPA earlier this year, under a three-level plan, employers would have no more record keeping or administrative burden than they currently have. They could choose to administer the program in the same way as they currently administer a 401(k) plans, or they could choose a default option by indicating what portion of the payroll tax is to go into private accounts as the taxes are paid and by reporting whether or not each employee has chosen the private investment option on the employee's W-2 form. The remaining administrative burden would be shifted entirely to the government.

The problem of administration costs arises because many workers would be depositing only a few hundred dollars a year. If there were a lot of investment options and the account holder switched investments frequently, administrative costs would consume much of the initial deposit. The NCPA says this problem can be solved by depositing everyone's money in large, generic funds until each individuals account grows large enough to warrant more investment choices.

Under the default option, taxes destined for private accounts would initially go into generic money market funds as they are collected. Once the Social Security administration determines what part of the fund belongs to each worker, the account would be invested in balanced portfolios of stocks, bonds and cash. After the account grows to a certain minimum size, workers could have more investment options by transferring their assets to a qualified account with a financial services company. At all three levels, funds would be managed by professional money managers. Holders of the individual accounts could only change managers once a year.

Assuming three percentage points of the Social Security payroll tax is deposited in private accounts each year, the report states costs would range from 18/100ths to 34/100ths of 1 percent of assets over the first five years, depending on assumptions made.

"Although each worker's deposit may be small, cumulatively these accounts will hold a huge amount of money. A program that big will be able to get some of the lowest prices in the history of financial services," said Goodman.