Social Security Reform:

Administrative Costs for Individual Accounts Depend on System Design

HEHS-99-131: Published: Jun 18, 1999. Publicly Released: Jul 16, 1999.

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Cynthia Maher Fagnoni
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Pursuant to a congressional request, GAO reviewed the costs of administering individual social security accounts and their effect on account accumulations and benefits, focusing on: (1) the factors that influence administrative costs; (2) the estimates that are available for administrative costs associated with individual accounts; and (3) how administrative costs might affect the accumulation of savings in individual accounts and the retirement benefits they provide.

GAO noted that: (1) when designing a system of individual accounts, the designers must make critical decisions about who would assume the new administrative and recordkeeping responsibilities, how much choice or discretion individuals would have in selecting their investment options, and how workers would receive their benefits when they retired; (2) the costs of administering a system of individual accounts would vary and would depend on these decisions and the types and level of customer service offered; (3) while any system has administrative costs, they could be higher for more decentralized systems and for those offering broader investment choices, more customer service options, or both; (4) because most social security reform proposals that include individual accounts do not provide explicit details on how the accounts would be implemented and managed, it is difficult to accurately assess the costs of administering them; (5) available cost studies have limitations because they do not capture all the likely costs associated with a new system; (6) however, the studies can at least provide a basis for understanding the possible range of administrative costs that individuals might incur under a new system; (7) although difficult to predict, administrative costs can have a significant effect on individual account accumulations; (8) GAO's analysis, which assumed account contributions equal to 2 percent of an individual's taxable earnings, illustrates this point; (9) in GAO's simulation, for a man who had average annual earnings every year for 45 years, a change in administrative cost from 0.1 percent to 1 percent reduced accumulations in his account by almost 22 percent; (10) a change from 0.1 percent to 2 percent reduced his account accumulation by almost 40 percent; (11) in more practical terms, he would accumulate $125,430 in his account under a 0.1-percent annual administrative cost, as opposed to $75,995 under a 2-percent administrative cost; (12) the proportionate effect on accumulations of these changes in administrative costs was approximately the same for all workers in GAO's analysis, regardless of whether they had low, average, or high annual earnings; (13) individuals may incur additional costs if they are required or choose to purchase an annuity, which ensures a steady stream of income throughout retirement; and (14) in the current market, the average administrative cost of purchasing an annuity is 5 percent of the amount being converted into the annuity.

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