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Administrative Costs and Equilibrium Charges with Individual Accounts

  • Peter Diamond

There are many individual account proposals. For government-organized accounts, the government arranges for both record-keeping and investment management. For privately-organized accounts, individuals directly select private firms to do these tasks. The government spreads the costs of government-organized accounts among accounts, outside sources of revenue, employers and workers. With privately-organized accounts, equilibrium prices reflect selling costs as well as administrative costs. Thus, government-organized accounts are organized on a group basis while privately-organized accounts are organized on an individual basis. In financial and insurance markets generally, the group and individual markets function very differently and yield different pricing structures. The paper describes a low cost/low services government-organized plan and estimates that it might cost $40-50 per worker per year. The nature of equilibrium with privately-organized accounts is discussed, with the conclusion that the costs would be very high compared to the cost of government organization.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7050.

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Date of creation: Mar 1999
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Publication status: published as Administrative Costs and Equilibrium Charges with Individual Accounts , Peter A. Diamond. in Administrative Aspects of Investment-Based Social Security Reform , Shoven. 2000
Handle: RePEc:nbr:nberwo:7050
Note: PE
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  1. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
  2. Diamond, Peter, 1992. "Organizing the Health Insurance Market," Econometrica, Econometric Society, vol. 60(6), pages 1233-54, November.
  3. Malcolm Edey & John Simon, 1998. "Australia's Retirement Income System," NBER Chapters, in: Privatizing Social Security, pages 63-97 National Bureau of Economic Research, Inc.
  4. Peter Diamond, 1998. "The Economics of Social Security Reform," NBER Working Papers 6719, National Bureau of Economic Research, Inc.
  5. Olivia S. Mitchell, . "Administrative Costs in Public and Private Retirement Systems," Pension Research Council Working Papers 96-4, Wharton School Pension Research Council, University of Pennsylvania.
  6. James M. Poterba & Mark Warshawsky, 2000. "The Costs of Annuitizing Retirement Payouts from Individual Accounts," NBER Chapters, in: Administrative Aspects of Investment-Based Social Security Reform, pages 173-206 National Bureau of Economic Research, Inc.
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