Another difference is government matching money. Bush's accounts would not have any. The government puts an amount equal to 1 percent of salary into the TSP accounts of workers hired in 1984 or after, even if they contribute none of their own money. It also matches employees' TSP contributions dollar for dollar up to 3 percent of salary and at 50 cents for every additional dollar, up to 5 percent of salary. (Employees hired before 1984 can participate in the TSP, but they receive no government contribution and are part of a different pension system that does not include Social Security.) Most federal employees may contribute as much as 15 percent of their salaries, or $14,000, to their TSP account every year. Bush's individual accounts could accept no more than 4 percent of a worker's wages and would be limited to $1,000 for the first year. Unlike with Bush's accounts, TSP participants can make withdrawals in the case of financial hardship or borrow from their accounts to buy a home.
The White House acknowledges that there are many differences between the TSP and the proposed accounts, and that Bush's system would be more expensive to run. Trent Duffy, a Bush spokesman, said the president mentions the TSP mainly as an example of a publicly run system that can offer substantial investment choices at relatively low risk and cost.
"The principal comparison is in that light," Duffy said. "That's sort of where it begins and ends."
As for annual administrative costs, the White House cites estimates from the Social Security Administration of about $3 for every $1,000 invested in the individual accounts. That would be more than five times the administrative cost of the TSP, but still cheaper than most private 401(k) plans. Cavanaugh, the TSP expert, called such numbers "ridiculously optimistic." (Cavanaugh has done work in the past for AARP, an advocacy group that opposes the Bush proposal. But he said he is not being paid by any side in the individual-account debate.) Experts say the TSP is inexpensive because the government has the advantage of economies of scale: a large workforce, toiling for one employer, supported by a relatively efficient computerized payroll network. Every federal payday, the government's 129 payroll centers deduct employees' TSP contributions from their paychecks and electronically transmit them to the National Finance Center in New Orleans, the system's record keeper.
In contrast, a national system of individual Social Security accounts would involve nearly 5.7 million employers, including more than 4 million small businesses with fewer than 10 employees and without the technological savvy of the government or large corporations. Private employers now have three months to report payroll tax payments to the Internal Revenue Service. Some of them, especially smaller businesses, do their reporting on paper, and errors are common. Also, many businesses do not identify the individual workers for whom such payments were made until April, when annual tax returns are due.
In such an environment, diverting a portion of Social Security payroll deductions into TSP-style accounts could be an expensive and logistically difficult task, experts say. A 2001 Social Security Administration study concluded that "infrequent wage reporting . . . could delay the time between when IA [individual account] contributions are withheld from pay and when they are credited to individual IAs." Such delays could be minimized, the report said, but only through higher administrative costs. Running such a system would cost the government between $700 million and $3 billion annually, the report's authors wrote, adding that there would be unspecified costs to individuals and employers that they did not study.
Duffy said employers would bear no additional administrative costs. "The employer wouldn't even know whether an employee had a personal account or not," he said. "The SSA would do all the personal account oversight."
He said the White House is relying on Social Security Administration actuarial estimates of administrative costs. In a Feb. 10 memo to Robert Pozen, a financial executive who served on Bush's Social Security Commission, Stephen C. Goss, the SSA's chief actuary, wrote that each account holder would pay a "modest" annual charge equivalent to 0.3 percent of assets. "This might require some federal subsidy in early years . . . when account balances are low and start-up costs are incurred," he wrote.
Cavanaugh said costs probably would be much higher. He pointed to a 1998 Labor Department study that found that average 401(k) plan administrative expenses were nearly $300 per worker for plans with 100 employees, and even higher for smaller businesses. A national system of individual accounts would face similar cost challenges, he said, ranging as high as $30 billion to $45 billion a year. (And that does not include the trillions of dollars in transition costs associated with continuing to pay Social Security benefits to current retirees as some tax revenue is diverted to the new accounts.) If individual participants were to pay administrative costs, even on the order of $100 per worker each year, those expenses alone would eat up so much of the personal account contributions that they would be an inferior investment to traditional Social Security for millions of workers, Cavanaugh said.
"Once you tell them that in advance, they are not going to sign up," he said.
