Tuesday, May 03, 2005

If only we were all millionaires!

Scrivener touts Vanguard's admiral shares as a way to cut administrative costs for privatized Social Security accounts.

A great idea. Let's see, how much money would personal accounts need to qualify for Admiral status?

Vanguard is expanding eligibility for Admiral Shares by reducing the minimum required to qualify for the shares to $100,000 per fund account, from $250,000.

Wow, cool! How long would it take to accumulate the $100,000 required to qualify for admiral status in a privatized SS account? Oh, say, 30 year, if you get a 6.5% return, or all of your working life, if you get a 3% return.

The reason account fees would be high is because the accounts start tiny by investment account standards. For an account with a thousand bucks, a $25 annual management cost zaps two and a half points right off the top.

There's also the problem that compliance cost would be high, and particularly high for small businesses or the self employed. The government run Thrift Savings program has a low overhead mainly because there is a single employer, so it costs very little to administer the accounts. With a few million employers and tens of millions of self-employed, administrative costs would be huge. The federal staff alone would be one of the biggest in the federal government, and that doesn't even include the complaince cost for businesses.


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