NCPA Report Refutes Claim of High Administration Costs For Private Social Security Accounts

Dallas – 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 new report published this week by the National Center for Policy Analysis.

Critics have claimed that administrative costs could run as high as 20 percent, but the NCPA says a properly structured reform plan could keep administrative costs to four-tenths of one percent or less.

"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 NCPA President John Goodman.

Under a three-level plan outlined in the NCPA report, 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 NCPA says costs would range from 18/100ths to 34/100ths of 1 percent of assets over the first five years, depending on assumptions made.

"This plan is designed to keep administrative costs low and at the same time ensure that workers enjoy the high returns that capital markets pay," said Goodman.

Brief Analysis No. 289