It Can Be Done: Individual Accounts Are Not Beyond Our Grasp

by Darcy Olsen

Darcy Olsen is an entitlements policy analyst at the Cato Institute.

When President John F. Kennedy said Americans would be the first to walk on the moon, skeptics said it couldn't be done. NASA's technology lagged years behind Russia's, and the Russians never did put a man on the moon. But Neil Armstrong's one small step made the dream reality. When it comes to visionary social policy, beware of skeptics who would reject a great plan simply because it means doing something for the first time.

Take the farsighted idea of transforming our troubled Social Security system into a system of personal accounts. Conservative estimates show that workers who invested their payroll taxes in personal accounts would get 3 to 5 times more retirement income than Social Security provides.

But skeptics, fearful of change, have attempted to smother the infant in the crib by latching onto the issue of the administrative costs. Imagine, they say, the logistical nightmare, the paperwork, of managing 140 million individual accounts. "No system to date has the capacity to administer such a system," wails the Employee Benefit Research Institute. Rocket scientists didn't know exactly how to put a man on the moon in 1965 either, but it didn't take them long to figure it out. Similarly, economic and financial experts have the knowledge, experience and foresight to overcome the hurdles that are inevitable with any new program.

Critics and skeptics claim that a system of personal accounts will cost more to administer than Social Security does. They fear that high management costs could consume, offset or even eliminate projected benefits. To be sure, no one knows exactly what administrative costs will be. But we have plenty of experience with a variety of retirement programs that indicates that we have no need to worry.

First, there are several existing retirement plans by which we can gauge costs. The giant Federal Retirement Thrift Investment Fund serves more than 2 million workers at an annual cost of just $16 per participant. The nation's largest defined-contribution pension plan, the College Retirement Equity Fund, costs even less to run than does Social Security. On the basis of actual experience with those and similar programs, it is reasonable to assume that the costs of administering a system of personal accounts could easily fall between $10 and $20 per person annually.

"Ah ha!" shout the skeptics, "Social Security only costs about $10 per person per year." That's partly because another agency, the Internal Revenue Service, collects the money, and partly because there are no investments to manage. So it's true that Social Security costs little to run, but, as my mother would say, you get what you pay for. In the case of Social Security, that ain't much.

Under Social Security workers get, at best, a measly 1 to 2 percent return on their money. And because of Social Security's fiscal crisis, people under age 40 will actually get less back from Social Security than they pay in. Private accounts, on the other hand, will cost a little more to manage, but workers could look forward to a return of 7 or 8 percent -- that's three times more for your money. The better deal is obvious.

Naysayers will, as they have always done, look for more ways to oppose change when their initial arguments fail. Let's try a more Kennedy-like approach: set the goal, and then work to achieve it.

Technology will play an extraordinary role. Even Jules Verne would be impressed with how fast and how far technology has advanced. Who'd have thought you'd be able to send an instantaneous message to a friend half way around the world at the push of a button? With e-mail we do it every day. As companies demand and receive more and better technology, administration will be done with a few strokes on the keyboard.

The history of the world is littered with disbelievers and skeptics. A typical character is the Yale University professor who gave the founder of Federal Express a "C" on his proposal for overnight delivery service, saying, "The concept is interesting and well formed, but in order to earn better than a 'C', the idea must be feasible." Today Federal Express is the world's largest express transportation company, serving 211 countries and earning annual revenues of more than $13 billion.

There is every reason to believe that investment companies will expand their capacity to manage millions of new accounts at low cost, bringing 140 million workers a safer and more secure future than can Social Security. Americans are very good at reaching their goals. It doesn't take a rocket scientist to know that if we Americans set the goal of replacing Social Security with a system more responsive to our needs, we will reach it. It's really just a small step, but it offers the promise of a giant leap in retirement security.

This article originally appeared in the East Valley Tribune, December 2, 1998. It also appeared as a Cato Daily Commentary, They Say It Can't Be Done, November 24, 1998.

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