Comparing Administrative Costs Of Pension Systems
March 31, 1999
One of the big issues in the Social Security reform debate is administrative costs, such as those for collecting contributions, record-keeping and paying out benefits. Calculating exactly what administrative costs are in any retirement system is a daunting task, and accurate international comparisons are even more difficult.
- However, economist Olivia Mitchell of the University of Pennsylvania found that the U.S. Social Security system costs a little over 3 percent of benefits to run, which is about average for industrialized countries, where costs vary from 1 percent in Norway to almost 7 percent in Greece.
- Costs in developing countries average almost 9 times higher than the industrialized countries: 27.78 percent versus 3.12 percent.
- They ranged from a low of 2.3 percent in Argentina to, incredibly, more than 130 percent in Peru.
Cost ratios are lower in the industrialized countries because they have large, mature programs with high benefits, while pensions in developing countries are modest.
Chile has had a pension system with individually managed private accounts since 1981. Early administrative costs were high; but they were inflated by startup costs and the small size of initial accounts. Over time, costs have fallen sharply.
Among industrialized countries, only in the United Kingdom, since 1988, have workers been able to save a portion of their contributions in private accounts. But a new study from the liberal Center on Budget and Policy Priorities finds administrative costs have been very high, reducing benefits by 43 percent below what they would be if costs were zero.
However, even if true, that does not mean workers are worse off, because rates of return are higher. According to a World Bank study, the privatized U.K. system has an average 8.8 percent annual return, while Chileans have gotten 9.2 percent -- 4 to 5 times that which Baby Boomers can expect to get from Social Security.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 31, 1999.
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