CRS Releases Report on Social Security Individual Accounts

Providing individual accounts (IA) as part of Social Security would require trade-offs between individual choice and efficient management, according to the report. A “high cost” solution would be to deposit contributions quickly into an account, which would provide high levels of employee control but also high administrative costs, the report indicates. A “low cost” approach would be to wait a few months before depositing contributions, which would result in less employee control and fewer investment options, but could also lower administrative costs, the report indicates.

The cost of having such plans would be easier to bear for larger employees who could spread the costs among employees, according to the report, and would be more harmful to small businesses. Employers with an administrative infrastructure already in place would also be less affected by any such change. However, the report indicates that most American companies are small, with fewer than 20 employees, and do not provide a 401(k)-style plan and thus does not have the infrastructure in place.

Employers might offset costs by reducing or restructuring the benefits dolled out to employees, the report suggests. It might also affect employees’ contributions to other retirement plans, with the report suggesting that they might, with more retirement income invested in volatile markets, invest more conservatively.

On the other hand, the report suggests, they might add more funds to make up for such risk, potentially raising their ultimate retirement income. The plans might also foster a “taste for saving”, according to the report.

President Bush has recently suggested that Social Security needs to be reformed, and has mentioned the possibility of pushing for individual accounts as part of the solution. The GAO has said that there is a need for such reform, but has noted that individual accounts alone would not solve the pending solvency issue (See GAO: Waiting to Fix Social Security Makes Problem Worse ). The Employee Benefit Research Institute has said that support for such reform dates back many years (See EBRI SS Privatization Backing at least 15 Years Old ).