Academic journal article Social Security Bulletin

Individual Social Security Accounts: Issues of Administrative Feasibility and Cost, 1998

Academic journal article Social Security Bulletin

Individual Social Security Accounts: Issues of Administrative Feasibility and Cost, 1998

Article excerpt

Individual Social Security Accounts: Issues of Administrative Feasibility and Cost, 1998*

The Employee Benefit Research Institute (EBRI), a nonpartisan organization with 20 years' experience in objective analysis of administrative policy issues for employer-based retirement plans, brought its expertise to bear on the issue of administering individual Social Security accounts. One of the major points of EBRI's overview of administrative considerations and trade offs involving individual accounts (IAs) is that, first, adding IAs with investment choice to Social Security could be the largest undertaking in the history of the U.S. financial markets. No system to date has the capacity to administer such a system, and it would take years to design, implement, and debug a new system and new software. Second, direct comparisons between employment-based retirement savings plans and Social Security reform proposals are tenuous at best. Social Security covers a substantial number of workers and businesses that have traditionally not participated in employment-based retirement plans. Another interesting and seldom recognized fact is that credit-based systems such as the current Social Security program are less difficult to administer than cash-based systems, which must account for every dollar in order to avoid lost retirement income. Moreover, Social Security IAs cannot be administered like 401(k) plans-that is, account contributions each pay period through payroll deduction-without adding significant employer burdens, especially on small businesses. Another issue that deserves further attention is that, if legally subject to personal property claims-such as in divorce cases-IAs could pose significant administrative challenges. Finally, IA benefits would be highly sensitive to administrative costs, according to results using the EBRI-SSASIM2 Policy Simulation Model.

The Importance of Administrative Forethought

Examining policy administration is an integral part of basic public policy analysis,' as history is replete with examples of inconsistencies between ideological intentions and administrative practices. Today's debate centers largely over whether to add individual investment accounts to Social Security, similar to savings vehicles currently found in the form of employmentbased "defined contribution" retirement plans.2

Although adding individual accounts (lAs) to Social Security is a highly political issue, an objective examination of how to administer such accounts raises concerns that cut across ideology. Consider the following:

Social Security policy directly affects 96 percent of the US. work force and their employers every pay period (Committee on Ways and Means 1998).

Over twice as many workers are covered by Social Security as the number of individuals in the United States who own shares in mutual funds (Investment Company Institute 1998). Administering IAs for almost 148 million workers covered by Social Security would be possibly the largest undertaking in the history of the U.S. financial services industry (Lussier 1998).

No unified system currently has the capacity to administer 148 million IAs. A system of IAs with full participation would include at least seven times the number of currently active 401(k) accounts.3

Because Social Security is such a large program, dissatisfaction (for example, from over- or under-regulation) with administering an IA system could reverberate through major economic markets and virtually every U.S. household. Hence, far from being unrelated to the social, political, and economic dissatisfactions with the current system that are precipitating interest in IAs,45 administrative issues will determine whether such accounts could actually be implemented, at what cost, and over what time period.

Uncertainties Abound

Providing Social Security IAs to all covered workers would impose uncertain administrative costs. …

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