KEEPING ADMINISTRATIVE COSTS LOW
February 28, 2005
As Americans consider Social Security reforms that include personal accounts, we can learn from the experience of other countries and from relevant U.S. experience about how to keep administrative costs low and protect inexperienced investors.
Administrative costs for accounts, as a percentage of assets, appear high in the beginning because the accounts are small. But the percentage falls over time. In Chile, for example, first year operating costs claimed more than 12 percent of assets. However, costs have now declined to about 1 percent of assets -- lower than the average mutual fund in the United States -- and will continue to decrease for workers who spend their entire lives in the reformed Chilean system.
There is ample evidence from around the world that administrative charges can be kept low:
- Administrative fees in Chile will be only 0.7 percent of assets over the lifetime of the average worker who contributes for his full working life.
- Costs are even less than 0.7 percent of assets for large employer-sponsored pension plans in Australia, Denmark and Switzerland.
- Costs are only 0.1 percent of assets in the Thrift Saving Plan (TSP) for federal civil servants in the United States.
It is reasonable to estimate that a personal account system in the United States will have administrative costs of about 0.3 percent of assets in 8 to 10 years, says James. And these costs are likely to fall even more after the system has existed for more than a decade --reducing costs for workers with small accounts to a level much lower than they could achieve as individual investors.
Source: Estelle James, "Social Security Reform: Keeping Administrative Costs Low," Brief Analysis No. 506, National Center for Policy Analysis, February 25, 2005.
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