Social Security Individual Accounts and Employer-Sponsored Pensions (CRS Report for Congress)
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| Release Date |
Feb. 3, 2005 |
| Report Number |
RL020305 |
| Report Type |
Report |
| Authors |
Patrick J. Purcell |
| Source Agency |
Congressional Research Service |
Summary:
The President’s 2001 Commission to Strengthen Social Security recommended
that Social Security be modified to include voluntary individual accounts. The
Commission acknowledged that establishing and maintaining a system of individual
accounts (IAs) could impose new costs on employers, particularly small employers.
The Commission’s final report urged that in designing and implementing a system
of IAs, policymakers should attempt to minimize the cost to employers while
maintaining the features of IAs that would make them attractive to workers.
Pension analysts generally agree that designing individual accounts would
require trade-offs between individual choice and efficient management. A relatively
“high-cost” approach would create a system of IAs in which contributions to the
accounts are deposited quickly, participants have substantial control over their
accounts and have many investment choices, but in which employers must take on
substantial new administrative duties. A “low cost” option would deposit
contributions several months after they have been deducted from employees’ pay,
give participants less control over their accounts and provide few investment choices,
but would minimize the administrative tasks required of employers. The low-cost
approach to implementing Social Security individual accounts would avoid imposing
significant new expenses on small businesses, but the result would be a system that
would have few of the investment features common to modern §401(k) plans.
The ability of an employer to absorb new administrative costs associated with
Social Security individual accounts would depend in part on its size and whether it
already sponsors a retirement plan for its employees. Large employers would be
able to spread the fixed costs of administering the accounts over more workers,
thereby reducing average costs. Employers that already offer their employees a
retirement plan have an administrative infrastructure in place to perform any new
tasks that might be required to maintain a system of individual accounts. Most
employers in the United States are small employers with fewer than 20 employees,
and most small employers do not sponsor a retirement plan for their workers.
Employers could seek to offset cost increases that arise from administering
individual accounts by reducing or restructuring the benefits they currently offer to
their employees. For example, employers who must absorb new costs to help
administer IAs might reduce contributions to their §401(k) plans or otherwise reduce
their existing pension benefits. Social Security IAs also could affect employees’
contributions to §401(k) plans. With more of their future retirement income
dependent on investment returns, some workers might invest their §401(k)
contributions more conservatively. Alternatively, exposure to greater investment
risk could encourage some employees to increase their contributions to §401(k) plans
in an attempt to offset some of this risk. As they gain experience with the accounts,
some workers might develop a “taste for saving” that would persuade them to save
more through other savings vehicles such as Individual Retirement Accounts (IRAs).
This report will be updated as legislative developments occur.
