Cost & Small-Business Technology Would Be Major Factors In Social Security Individual Accounts

September 26, 2001
Craig Copeland
(202) 775-6356, EBRI

WASHINGTON, DC—The viability of any system of Social Security individual accounts would depend largely on how well their operation, administrative feasibility, and costs are addressed before a political decision is made to adopt them, according to a new report by the nonpartisan Employee Benefit Research Institute (EBRI).

The EBRI report-which takes no position for or against individual accounts (IA) in Social Security-examines the key issues that will determine whether such accounts are logistically feasible, including two in particular:

  • Administrative costs (which would inevitably reduce any investment earnings from IAs).
  • Technological limitations of U.S. small businesses (which would make it virtually impossible for workers' contributions to be transferred to their Social Security IAs quickly and efficiently without significant increases in expenses to these businesses).

    In order to keep administrative costs low and avoid saddling small-businesses with significant expenses, a feasible system of individual accounts would look nothing like a typical 401(k) plan, at least initially, the EBRI report finds. If a typical Internet-based 401(k) with easy access to account information and investment options can be described as the "Porsche" of retirement savings plans, said EBRI President Dallas Salisbury, then the public should realize that "a workable, cost-effective individual account within Social Security will most likely look like a 'Model T.'"

    "The issues and options in administering IAs raise concerns that cut across ideology," Salisbury added. "Can they be designed in a way that is not too complex for participants to understand, too burdensome for small employers to administratively support, too difficult for record keepers to administer, or too expensive for low- and moderate-income participants to afford?"

    EBRI's September Issue Brief/Special Report provides an update of the November 1998 EBRI Issue Brief, which presented a detailed analysis of the most salient administrative issues facing the current Social Security reform debate-issues that challenge policymakers to think carefully about how their proposals could be implemented, in order to achieve their policy goals.

    The new EBRI report points out that these issues require separate analysis that cannot be obtained simply by looking at the experiences of employment-based retirement plans, which cover a much smaller and less diverse population than would be eligible for individual accounts under Social Security. The design of an individual account system that could potentially be administered in a cost-efficient and timely way would most likely bear little or no resemblance to a modern 401 (k) retirement plan, the report concludes.

    Salisbury noted that no Social Security reform proposal to date is specific enough in its details to permit an objective estimate of whether and how quickly individual accounts could function, what they would cost to operate, and how much work would be involved for small employers. He noted "The potential impact of any individual account system is massive, since Social Security directly affects 96 percent of the employed U.S. work force and their employers."

    Among the major findings in this analysis include:

    • Adding individual accounts to Social Security could be the largest undertaking in the history of the U.S. financial market, and no system currently exists that has the capacity to administer such a system. The number of workers currently covered by Social Security-the largest single entitlement program in the nation-is at least four times higher than the combined number of all tax-favored employment-based retirement accounts in the United States, which are administered by hundreds of entities.

    • Direct comparison between employment-based retirement savings plans and Social Security IAs are difficult at best. Social Security covers workers and businesses that are disproportionately excluded from employment-based plans. Thus, under an individual account system, total administrative expenses could be higher relative to benefits because most employers do not use automatic payroll systems, many do not use direct deposit, and many millions of short-service and young workers are not included in either public or private savings plans.

    • Social Security individual accounts cannot be administered like 401(k) plans without adding significant employer burdens-especially on small businesses. Under the current wage reporting and tax collection process, it would take at least seven to 19 months for every dollar contributed to an individual's account to be sorted out from aggregate payments and credited to his or her individual account. This "float period" could result in substantial benefit losses over time. Options for preventing such losses involve difficult trade-offs, such as increased government responsibility, increased complexity, greater employer burdens, and/or investment restrictions for beneficiaries. Elimination of these "float periods" by requiring faster action by small employers would lead to significant new administrative burdens and costs-an estimated $1 billion a year more just for small businesses, according to past estimates.

    • If legally considered personal property, the individual accounts of married participants could post significant administrative challenges. Some proposals would require contributions to be split between spouses' individual accounts, requiring records on participants' marital status to be continuously updated to ensure that contributions are correctly directed. Also, dealing with claims on contributions in divorce cases could place record keepers in the middle of spousal property disputes.

    • Individual account benefits would be highly sensitive to administrative costs, according to results using SSASIM. Workers born between 1976 and 2026 would receive between 14 percent and 23 percent lower total benefits under high administrative cost assumptions than under low-cost assumptions, indicating that additional research on administrative costs is essential to assessing how-or whether-individual accounts could achieve the lower-cost assumptions. Proposals to use a flat percentage administrative charge could approach the lower-cost assumptions if the system had a simple (and therefore "inexpensive") design.


      EBRI Issue Briefs are monthly topical periodicals providing expert evaluations of employee benefit issues and trends, including critical analyses of employee benefit policies and proposals. Members of the press may request complimentary copies of EBRI Issue Brief no. 236/Special Report SR-40, "Individual Social Security Accounts: Administrative Issues," from Alicia Willis at (202) 775-9132. Reporters may also obtain an executive summary of the report at Full-text copies of the report are available online by contacting Danny Devine (202) 775-6308, e-mail: for the "press only" password. Others may purchase copies for $25 prepaid or pdfs for $7.50 prepaid by calling (202) 775-9132.

      EBRI is a private, nonprofit public policy research organization based in Washington, DC. Founded in 1978, its mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI does not lobby and does not take positions on legislative proposals.

      # # #