Costly Precedents Seen for Retirement Reform

A special presidential commission seeking to make private investment accounts part of Social Security confronted an unexpected challenge Wednesday: evidence that similar retirement accounts now used at colleges and in government are far more expensive to operate than previously known.

Commission members, although still backing the accounts, were clearly concerned about the costs of devising a new system of personal investments for 140 million American workers, many of whom don’t know a stock from a bond.

Simply creating a record-keeping system for individual accounts “was the biggest central challenge we had,” Roger Mehle, head of an investment program for 2.5 million federal workers, told the commission.

The federal government spends more than $50 million a year on record-keeping for its civilian workers’ Thrift Saving Plan, Mehle said. And that figure does not include the costs borne by individual agencies and departments in sending information about the retirement program to their workers.

James Wolf, who runs the world’s largest private retirement system, told the commission it costs $10 to handle a phone call inquiring about investment options and as much as $45 for each phone call about the payment of retirement benefits. The participants are nearly 3 million university and college employees enrolled in the Teachers Insurance and Annuity Assn.-College Retirement Equities Fund.

The expenses suggest that the cost of creating and running investment accounts carved out of Social Security could be accompanied by a major financial burden on recipients as well as their employers. High administrative and management costs could cut significantly into the returns generated by the accounts.

Since President Bush backed the idea of private accounts during his election campaign, most of the debate has focused on the idea of injecting market risk into a program of government retirement benefits. The president wants to allow workers to keep a portion of their Social Security payroll taxes and place the money into individual portfolios of stocks and bonds, probably in the form of mutual funds.

But the testimony at Wednesday’s hearing suggests there are significant administrative and financial obstacles for such a system.

The potential problem “is not just unique to this country,” said Estelle James, a member of the commission. “Many countries have had problems when they tried to institute record-keeping systems for their individual accounts.”

In the current Social Security system, as long as 18 months may elapse before earnings records are posted to an individual’s account. “We don’t know” what the costs of making deposits once a month into investment accounts would be, commission member John Cogan said.

Another member, Gwendolyn King, said costs would be driven up by the necessity to provide information in multiple languages about the retirement accounts. King, a former Social Security commissioner, recently visited Social Security offices in Chicago where questions were answered in 15 languages, she said. Providing information in many languages for private accounts would “complicate the calls,” she noted.

Despite their concerns about the complexities of any new system, the commission members still think private accounts represent an attractive way to give individuals an opportunity to save for retirement.

Their mandate from Bush is to come up with a workable system for creating private accounts without increasing taxes or touching the benefits of current retirees or those near retirement age. Disability and survivors benefits also would remain unchanged.

Social Security faces a long-term financial crisis in 2038, when the trust fund will be exhausted and payroll taxes will be able to pay only 72% of the benefits promised under current law. To close the gap, the unattractive choices would be a hefty increase in taxes, a major reduction in benefits or large-scale federal borrowing.

The commission hopes to avoid those choices by reforming the system, co-chairman Richard Parsons said at a news conference before the commission meeting. “The question is where the cash is going to come from.”

Benefit cuts for future retirees may be a possibility, but the commission hasn’t developed any detailed plan, Parsons said.

“Have we made any conclusion regarding any of that? Not at this point in time,” he said.

Although there is widespread concern about the fiscal future of Social Security, its promises of benefits to U.S. workers are solemn obligations that the federal government will honor, said commission co-chairman Daniel Patrick Moynihan, the former Democratic senator from New York. “We need to find the assets to honor the commitment.”