Why the Star Wars comparison? Because private accounts are a complex and costly edifice, greatly oversold. No one has shown that they can actually work.
I’m leaving aside all the big-picture questions, such as who gains or loses from private accounts and whether other reforms should be tried instead. It won’t even be easy to find the money to finance these accounts, because the scheme needs a huge influx of federal funds. The drop in the current and projected budget surplus, revealed last week, will make it tough to fund anything new.
Practical stuff: But those aren’t my subjects. I’m into housekeeping–the practical stuff, such as the cost of signing people up for personal accounts, keeping track of their choices and fixing mistakes. Those chores are more complex than you think, which is what makes the Star Wars analogy apt. If Congress said “Go,” would private accounts really do the job?
Believers cite as their model the federal 401(k), known as the Thrift Savings Plan. Social Security, they say, could simply expand that model to cover the country as a whole.
Not likely. The thrift plan serves 2.5 million federal employees. In most cases, $4,900 gets added to their accounts each year. The money goes in automatically, through payroll deduction, and workers can manage accounts online. Even with just one employer, “it was a challenge to get all the agencies singing from the same hymnbook,” says Francis Cavanaugh, the plan’s former executive director.
Social Security, by contrast, might start with 154 million people and add 5 million names a year. It’s dealing with more than 6.5 million employers, almost all of them small. More than 80 percent of them report wages on paper rather than electronically.
The public rolls include part-timers, seasonal workers, non-English speakers, tens of millions of people who know zip about investing and 10 million who don’t even have a bank account. If 2 percent of earnings went into private accounts, about half of all workers would contribute $400 or less per year, says Dallas Salisbury, head of the Employee Benefit Research Institute. All those accounts–large or small–need tracking, tallying and telephone service at maybe $10 a call. “To think you could run this like the thrift plan, you have to be out of your mind,” Cavanaugh says.
I can’t begin to put all the potential administrative problems on a single page, but here are a few for starters:
That normally doesn’t matter, because it doesn’t affect any Social Security benefit you get. But are you willing to wait up to 22 months for your personal money to be invested? Probably not. For faster crediting, employers and the self-employed would have to report to the government more often–producing a big cost increase. What’s more, Social Security couldn’t possibly handle all those paper forms. Even small employers would have to go electronic.
The iceberg: These questions are just the tip of the iceberg. For example, who would keep track of the beneficiaries of your account? Is it OK to have all private accounts paid out as a lifetime annuity (the simplest system), or do you want the option of taking a lump sum? Should there be welfare for lower-income retirees who take lump sums and then run out of money?
A Clinton task force studied personal accounts in 1998. “The costs are not trivial,” says economist and task-force member Jeffrey Liebman of Harvard University. For a simple system, run by Social Security and with everyone automatically enrolled, the study put the annual cost at $20 to $30 per head (including administrative costs to employers and the IRS, plus the price of money management). That’s around $4 billion that is not spent now. Costs could double or triple for a system that’s more like a corporate 401(k).
Supporters of personal accounts dismiss these objections by saying that modern technology will find a way. That’s what they said about a lot of dot-coms too.
