NCPA - National Center for Policy Analysis

Administrative Costs Of Private Social Security Accounts

April 21, 1999

If individuals were allowed to invest a portion of their Social Security payroll tax dollars in private investment accounts, critics say administrative costs could be as high as 20 percent.

However, overhead costs depend on how the investment program is structured and how the accounts are managed, says economist John Goodman, president of the National Center for Policy Analysis.

Overhead costs would be less than 40 basis points (4/10ths of 1 percent) per year for a plan that did not increase employers' record-keeping burden significantly. Under such a plan, funds destined for private accounts would first be placed in generic money market funds managed by professional asset managers chosen through an open, competitive bidding process.

Once the Social Security Administration completed its annual reconciliation of workers' payroll contributions, the private money market funds would assign ownership shares to individual workers. Then workers would have a choice of several higher- yielding balanced investment funds -- diversified portfolios of stocks, bonds and money market instruments -- and participants could shift from one balanced fund to another annually.

Eventually, even the account balances of workers with small contributions would be large enough to attract fund managers. And as assets increase, the cost as a percent of assets would fall.

Assuming a contribution of 3 percent of payroll subject to Social Security taxes:

  • Costs would range from 0.18 percent to 0.34 percent of assets over the first five years.
  • By comparison, the Federal Thrift Plan, often cited as an example of an efficient retirement plan, had an expense ratio of 0.65 percent in its second year.
  • A balanced mutual fund that is currently available has a total cost of about 0.4 percent of assets.

Because of its size, this program might be able to demand the lowest prices in the history of financial services, says Goodman.

Source: NCPA President John C. Goodman, "Administering Private Social Security Accounts," Brief Analysis No. 289, April 20, 1999, National Center for Policy Analysis, 12655 N. Central Expy., Suite 720, Dallas, Texas 75251, (972) 386-6272.

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