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77 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0074 and id is 1 raw text is: March 10, 1999 No. 77 ADMINISTRATIVE FEES NO BARRIER TO PERSONAL RETIREMENT ACCOUNTS Questions have been raised about the technical feasibility of substituting privately administered personal retirement accounts for some or all of Social Security's retirement benefits [Cloneerns h system. Particular concerns about the adm have been expressed about the au thent administrative and fund managem management costs attached to private retirem private retirement accounts. concerns are Such concerns are easy to remedy. They do not justify retaining centralized administration of personal retirement accounts or investment of contributions by the Social Security Administration, as some have suggested. Some Social Security reform proposals would ive b inistr Costs ient a masy to Consequently, suggestions have been made that the collection of contributions and the record-keeping should be left, centralized, in the hands of the Treasury and the Social Security Administration (SSA), and that only the investment of the funds should be privatized. (Having Social Security invest the funds directly is too great a threat to the free market to consider that option.) In the first few years of any retirement account, the accumulated contributions and the investment income are small. During that time, a fixed dollar administrative and management fee (perhaps $50 a year) might absorb a substantial portion of the earnings. This is particularly true if the worker is a low-wage earner, and if the contributions are restricted by law to a limited percent of income. The same fee would offset a smaller percentage of the investment earnings of a higher-paid worker.1 For all een expressed participants, the fees would ative and fund gradually become insignificant attached to as the accounts grow larger ccounts. Such over time. i-emedy. A flat administrative fee makes economic sense because it costs as much to process a $10 deposit as a $1000 deposit, or to mail an account statement for a small account as a large account. Instead of flat fees, however, many financial institutions employ a sliding fee schedule that shifts some of the administrative costs from small accounts to large ones (or from early years of let workers set aside (or carve out) 2, 3, 5, or 10 percentage points of their payroll tax in mandatory personal retirement accounts in exchange for reductions in future Social Security retirement benefits. The less generous of these percentage carve-outs would lead to very small contributions that might not They do be economical for private sector financial institutions to handle. not justify retaining last for many years, an account to later years). Mutual funds go further, and charge a flat percent of assets with no cap. This enables them to keep the rate very low, a few tenths of a percent in the cheapest funds. Institutions undercharge small account holders to build up a business relationship that they hope will by which time the accounts will be larger and more profitable to manage. Institute for Research on the Economics of Taxation either centralized administration of personal retirement accounts or inveshtment of contributions by the Social Security Administration... IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 e Fax 202-463-6199 0 Internet www.iret.org

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