AARP runs television spots panning the idea of allowing tens of millions of U.S. citizens to establish private accounts for their retirement, as part of the federal Social Security program.
President Bush travels the country pitching these accounts as a way to modernize the system.
Meanwhile, think tanks are busy trying to weigh the policy implications of any Social Security tweaks.
But while debate still roars about whether the program is in danger of running out of money by 2041, as the Social Security Administration estimates, none of the aforementioned parties have pondered the technology investment needed to make private accounts a reality.
What would this information system look like? How long would it take to build a system to manage private accounts? What are the hurdles in data management?
“Those are big questions,” says Virginia Reno, vice president of income security at the National Academy of Social Insurance, a think tank that examines social insurance policy. “I don’t think many [people] are looking for answers.”
Currently, the biggest idea about reforming Social Security revolves around allowing the 159 million workers currently covered to divert 2 percent to 4 percent of the 15.3 percent tax paid on income to private accounts.
The goal? Close a $4 trillion unfunded liability in current dollars through 2079.
In theory, these accounts would earn a better return than Social Security, whose assets will be depleted in 2041, according to the 2005 annual report from Social Security’s board of trustees, released March 23.
Indeed, a report commissioned by President Bush on ways to strengthen Social Security, released in December 2001, didn’t mention information technology once.
Mark Lassiter, press officer for the SSA (Social Security Administration), says pondering the technology needed to handle private accounts is “premature” given that the proposals are still being formed.
“In politics, you often decide what to do and then ask how to do it,” says Dallas Salisbury, CEO of think tank Employee Benefit Research Institute. “It’s as if the question of how to do it is not being asked.”
One thing is certain: Social Security reform would require heavy lifting on the IT side. And Bush has said he wants private accounts in place by 2009. Hitting that target is increasingly unlikely.
“If the SSA built a system [for tracking private accounts] itself, it would take at least three to five years to build,” says Marcus Fedeli, manager of federal opportunity products at Input, a consulting firm. “That’s conservative. It could take three years just to design the system.”
In the meantime, the key information management issues are:
Challenge: Designing the system
Fix: Limit options
When current Social Security processes are compared to what would happen if private accounts are adopted, the complexity becomes apparent.
Today, SSA systems account for a limited number of data inputs.
Is the beneficiary alive? What’s the age? Are there dependents? Is there a divorce?
Once those questions are answered, they are matched to rules and formulas, and a check is sent.
Private accounts introduce moving parts.
What percentage of funds will be invested in a private account? Did the allocation change this quarter? Should the accounts be paid in an annuity if below a set level or taken in a lump sum? This information would probably be collected quarterly.
And money needs to go to accounts faster.
Currently, it can take 18 months to reconcile individual contributions to Social Security, Salisbury says.
That lag applied to private accounts means you could miss an entire bull market.
“It’s impossible to do what has to be done,” says Francis Cavanaugh, the first executive director of the Federal Retirement Thrift Investment Board, which was the agency responsible for administering the Thrift Savings Plan for federal employees. His tenure ran from 1986 to 1994.
The Thrift Savings Plan is often cited as an example of how private accounts in Social Security could work. The plan is like a 401(k) for federal employees.
The catch? You can’t compare the two programs because Social Security processes millions more transactions, Cavanaugh said.
Launching a record-keeping system for the federal savings plan was easy compared to what would be required for private accounts, he says.
“Our system worked because I could rely on the agencies’ systems and only had to deal with one employer—the U.S. government,” Cavanaugh said. “Our challenge was getting all the agencies to work together and report data in a uniform fashion. We then built a record-keeping system that took it in.”
According to Salisbury, building a system is daunting but not impossible.
To simplify the system, individual choice could be removed by making accounts mandatory, setting an allocation rate, say 3 percent of all Americans’ salaries, and allowing one investment mix, say 40 percent in a stock fund, 40 percent bond fund and 20 percent cash.
“Voluntary accounts are harder because they allow choice,” Salisbury says. “Every option makes the system more complicated. If accounts are mandatory with set options, you know the inputs.”
Next Page: Managing the data.