Recent Research Findings on Retirement and Aging from the Urban Institute

[LiberalFighter]

Recent Research Findings on Retirement and Aging from the Urban Institute

Adding Individual Accounts to Social Security

Our research shows that outcomes in individual accounts will be sensitive to administrative costs. The average administrative cost across all mutual funds is 1.1 percent, but the cost of a centralized system could be much lower. The Social Security actuaries, in fact, suggest that costs could be as low as 0.3 percent. Although the difference between 1.1 percent and 0.3 percent may seem small, over an entire career it can create a 20-percent differential in the size of a typical individual account balance.

Realized rates of return would also play an important role in outcomes under individual accounts. The real rate of return will depend on individual investment decisions and the market returns realized during an individual's career. Most analyses of individual account proposals assume constant rates of returns for stocks and bonds, but actual returns vary over time. Individuals retiring during a market slump, for example, could realize significantly less from their accounts than those retiring during a bull market.

Under a voluntary system of individual accounts, outcomes also depend on who opts in and who stays out. Recent data from the Survey of Consumer Finances show that younger people, those in good health, those with more education, and those with substantial assets are more likely to take risks than their counterparts, and thus may be more likely to participate in individual accounts. A voluntary system will also need to establish rules about whether individuals can change their participation decisions over time.