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Retirement Planning > Retirement Investing

CBO: Administration Can Cut Retirement Asset Totals

By Allison Bell

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NU Online News Service, March 31, 2004, 5:50 p.m. EST – The efficiency of Social Security privatization efforts could have a big effect on participants’ account balances at retirement.[@@]

Several existing pension administration systems studied could eat up as little as 2% of the participants’ assets or as much as 30% of the assets, according to a Congressional Budget Office report released earlier this month.

Ben Page, an analyst in the CBO’s macroeconomic analysis division, led a team of authors that compared estimated administrative costs for the current Social Security system, federal employees’ Thrift Savings Plan, mutual funds, and large and small private defined contribution plans.

The cost of running the program and distributing benefit payments appears to be lowest for Social Security, Page writes.

Page estimates Social Security costs only $11 per participant per year. If Social Security were a private pension plan and participants had to pay the $11 annual cost, the cost would reduce final assets at retirement only 2%, Page writes.

Page found that members of some small defined contribution plans may lose the highest percentage of assets to administrative costs. A consulting firm told Page that it believes the cost of administering a typical small defined contribution plan amounts to $60 per account per year along with an annual fee equal to 1% of account assets. That level of expense could reduce a participant’s account balance at retirement by as much as 30%, Page warns.

Mutual funds cost participants about 1.09% of assets and reduce the asset total at retirement by an average of 23%, Page says.

But Page advises members of Congress and other readers to take the comparisons with a grain of salt.

“Evidence from existing systems, whose size and mix of participants differ from those of a nationwide system of private accounts, is of course only suggestive ? not predictive ? of the actual costs of administering a system of private retirement accounts,” Page writes.

The CBO has posted Page’s paper on the Web at http://www.cbo.gov/showdoc.cfm?index=5277&sequence=1

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