Administration Costs and the Relative Efficiency of Public and Private Social Security Systems

With a growing consensus developing in favor of transforming Social Security into a system of individually owned, privately invested accounts, critics of privatization have begun warning that individual accounts would be too complex and costly to administer. However, a careful examination of the administrative issues involved in individual accounts shows that, while administrative issues should be carefully considered in designing a privatized system, individual accounts are both administrable and affordable.

The cost of administering existing retirement savings programs indicates that administrative and money management expenses for a system of individual accounts could amount to anywhere from roughly 1.17 percent to 1.83 percent of assets, or roughly $35-$55 per worker for the first year. After five years, as the size of the average account increases, the cost would be anywhere from roughly 30 to 65 basis points, or $54-$117 per year. For the great majority of businesses with outside payroll services, the col-lection function would entail little, if any, addi-tional cost. For those businesses that do payroll without the aid of technology, there would be some modest additional reporting requirements.

This cost is slightly higher than that of the current government-run Social Security program. However, in exchange for slightly greater administrative costs, workers in a privatized system would receive a greater rate of return on their investment and better and more secure retirement benefits.

In short, administrative costs are not a barrier to privatizing Social Security.

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