NCPA - National Center for Policy Analysis

GAO Reports Overhead Costs For Individual Retirement Accounts Can Be Minimized

July 21, 1999

Critics of allowing individuals to invest a portion of their Social Security payroll tax dollars into private retirement accounts say the cost for administering such a program would be too high. However, the General Accounting Office says that administrative costs can be high or low, depending on the plan's design.

  • The GAO report cites estimates by the Employee Benefit Research Institute that if the costs of administering similar existing programs, 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.
  • State Street Corporation, a private financial services company, provided the most detailed analysis of costs per administrative function based on known costs, says the GAO.
  • According to State Street, costs for a decentralized system of personal retirement accounts could range from 19/100ths to 34/100ths of 1 percent of assets in the fifth year of the plan, depending on assumptions made.

Even for small "mom and pop" firms with few employees, State Street has found that costs can be kept low. Using a methodology developed by State Street, the National Center for Policy Analysis published estimates earlier this year for a three-level plan in which employers would have no more record-keeping or administrative burden than they currently have. They could choose to administer the program like 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. The remaining administrative burden would be shifted entirely to the government.

Under the default option, NCPA estimated that the administrative costs for the first five years are less than 4/10ths of 1 percent per year under a system in which employees invest 3 percent of taxable wages.

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 individual accounts grow large enough to warrant more investment choices.

Source: General Accounting Office, "Social Security Reform: Administrative Costs for Individual Accounts Depend on System Design," June 1999; John C. Goodman, "Administering Private Social Security Accounts," Brief Analysis No. 289, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

For NCPA report

http://www.ncpa.org/pub/ba289/

 

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