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Administrative Costs of
Private Accounts in Social Security
  March 2004  


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Preface

A number of proposals for modifying Social Security call for the creation of a system of private retirement accounts. One important consideration, among many, in evaluating such proposals is the cost of administering the system. The operation of any system of accounts involves a number of administrative tasks whose costs will ultimately affect a retiree's account balance. To assess the range of possible administrative costs that a system of private accounts might generate, this Congressional Budget Office (CBO) study--prepared in response to a request from the Ranking Member of the House Ways and Means Committee and the Ranking Member of the Subcommittee on Social Security--examines the costs of four systems used to fund retirement in the United States: Social Security, the federal government's Thrift Savings Plan, retail mutual funds, and private defined-contribution pension plans.

Ben Page of CBO's Macroeconomic Analysis Division wrote this study under the direction of Douglas Hamilton and Robert Dennis. Paul Cullinan, Peter Diamond, Randall Mariger, Olivia Mitchell, David Moore, Noah Myerson, James Roosevelt, Ralph Smith, and Jan Walliser provided valuable comments.

Juyne Linger edited the study, and Christian Spoor proofread it. Maureen Costantino produced the cover and figure and prepared the study for publication, and Annette Kalicki prepared the electronic versions for CBO's Web site.

Douglas Holtz-Eakin
Director
March 2004




CONTENTS


1  Summary and Introduction
2  Administrative Tasks in a Pension System

Collection and Processing

Asset Management

Calculation and Payment of Benefits

Enforcement and Oversight

Marketing and Sales

3  Administrative Costs in Existing Systems

Social Security

The Thrift Savings Plan

Mutual Funds

Private Defined-Contribution Plans

Annuities

4  The Administrative Costs of a Personal Account System: Identifying the Trade-Offs

Collection and Processing

Asset Management

Calculation and Payment of Benefits

Enforcement and Oversight


Table
   
1-1.  Estimated Administrative Costs of Pension Systems and Their Effect on Assets at Retirement
   
Figure
   
2-1.  Administrative Tasks in a Pension System
   
Box
   
3-1.  CBO's Methodology for Comparing Administrative Costs
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