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June 24, 2005

Dean Baker on the Administrative Costs of Private Social Security Accounts

From his June 16 Ways-and-Means testimony:

A single centralized system of accounts (which does not exist in any of the countries that have opted for privatization) could in principle lower costs, especially if it minimized workers’ choices in selecting investments and switching between investments. President Bush’s Social Security commission estimated that a bare-bones centralized system would cost roughly ten times as much as the current system. (There has been considerable confusion about this point because of how the commission framed its cost estimate. The commission estimated that the administrative cost would be 0.3 percent of the stock of money in an account. This means that the fee on a dollar placed in an account would be 0.3 percent for each year that dollar is in the account. Some dollars will be in an account for forty years, while some dollars placed, in the account just before a worker retirees, will be there for just a short time. If a dollar is a worker’s account for an average of twenty years, then this 0.3 percent fee will be paid twenty times, making a total administrative cost of 6.0 percent, compared to a cost of just 0.5 percent on the dollar placed in the Social Security...

Add in the risks beneficiaries bear and the trading losses from price pressure (unless they are prohibited from switching from bonds to stocks and back again), and it becomes hard to think of private accounts as in any way a good deal.

Posted by DeLong at June 24, 2005 07:48 AM