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Administration Costs and the Relative Efficiency of Public and Private Social
Security Systems
by Robert Genetski
Robert Genetski is senior managing director of Chicago Capital, Inc., and former chief economist at Chicago's Harris Bank.
Executive Summary
With a growing consensus developing in favor of transforming Social Security
into a system of individually owned, privately invested accounts, critics of
privatization have begun warning that individual accounts would be too complex
and costly to administer. However, a careful examination of the administrative
issues involved in individual accounts shows that, while administrative issues
should be carefully considered in designing a privatized system, individual
accounts are both administrable and affordable.
The cost of administering existing retirement savings programs indicates that
administrative and money management expenses for a system of individual accounts
could amount to anywhere from roughly 1.17 percent to 1.83 percent of assets,
or roughly $35-$55 per worker for the first year. After five years, as the size
of the average account increases, the cost would be anywhere from roughly 30
to 65 basis points, or $54-$117 per year. For the great majority of businesses
with outside payroll services, the col-lection function would entail little,
if any, addi-tional cost. For those businesses that do payroll without the aid
of technology, there would be some modest additional reporting requirements.
This cost is slightly higher than that of the current government-run Social
Security program. However, in exchange for slightly greater administrative costs,
workers in a privatized system would receive a greater rate of return on their
investment and better and more secure retirement benefits.
In short, administrative costs are not a barrier to privatizing Social Security.
Index of Social Security Choice Papers
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