Are Private Social Security Accounts Practical?
By Jane Bryant Quinn
"Backers aren't paying nearly enough attention to the costs and complexity of private accounts," said Dallas Salisbury, president of the Employee Benefit Research Institute in Washington and a member of the National Commission on Retirement Policy.
Under the plan proposed by the NCRP, 2 percentage points of your personal Social Security tax (which is 7.65 percent for employees) would be diverted into a private account.
Private firms would manage the money supporting these accounts. You'd invest in giant mutual funds, indexed to the broad market for stocks and bonds. (An index fund mimics the performance of the market as a whole.)
At retirement, you'd be required to roll at least part of your private account into an annuity, which would give you a monthly income for life. Private insurers would bid for the right to offer these annuities.
Other reform plans would have you invest most or all of your money directly in retail mutual funds and handle your retirement withdrawals as if you had an individual retirement account.
Now let's talk costs.
Today, employers incur the cost of collecting your Social Security tax and remitting it to the government -- sometimes daily, sometimes quarterly, depending on the firm. Once a year, employers send detailed W-2 forms, reporting on how much you earned and what was deducted for Social Security.
The easiest way to handle private accounts would be through employers. You'd tell your company where to send your 2 percent.
But this raises the company's administrative costs. About half the small employers would consider this a burden, according to a recent survey by the National Federation of Independent Business (NFIB) in Washington.
They'd rebel if they had to inform employees of their investment choices and help people switch their money from one account to another. "Administering the plan is a non-starter," says NFIB senior research fellow William Dennis.
Alternatively, your company might send your whole Social Security tax to the government. You'd have to tell Social Security how you wanted your money invested. (There'd be an automatic choice for people who didn't specify.) The government would credit your money to your chosen mutual fund and handle any investment changes you decided to make.
This approach minimizes the employer's cost. But it would require a huge expansion of Social Security. Currently, there are some 150 million Social Security accounts -- most of which are on automatic pilot. But millions of savers would demand individual attention if these were personal investment accounts.
The NCRP assumed that the overhead would be small. A modest record-keeping and money- management fee would be subtracted from everyone's private account (after a special government appropriation for start-up costs).
But how small would the fees be, really? Record-keeping is only part of it. Social Security would also have to answer millions of questions about investing, create a massive investment education program (half of America doesn't know the difference between stocks and bonds) and handle all the money transfers.
At retirement, you'd also have to pay the cost of a private annuity.
At 2 percent of pay, about 40 million workers would contribute less than $80 a year to their accounts, Salisbury says. How big an annuity is that?
Expenses would run much higher if savers had to arrange for their own investments through independent mutual funds. But that would be prohibitively expensive for small accounts. In Chile's privatized system, costs run an average of 3.5 percent a year.
And here's a question: When would your money be invested?
Employers fill in W-2s only once a year. If the government handles the records, the 2 percentage points of your Social Security tax deducted during 1998 wouldn't be credited to your account until 1999 and might not be invested until the middle of '99. So you couldn't make quick investment decisions.
Finally, what would happen to the 2.4 percent of Social Security records (60 million, last year) that can't be matched to individual accounts? These records land in limbo because Social Security numbers are wrong, paper documents are illegible, or companies go bankrupt and don't report.
Currently, you find out about any missing years when you apply for Social Security benefits. Often, your account can be reconstructed. But how would you "invest" a missing private account, retroactively?
In theory, 150 million private accounts are doable. But no one is telling me how to do them yet.
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