Administration Costs and the
Relative Efficiency of Public and
Private Social Security Systems
A consensus has been reached on several issues in the debate over the merits of the present government-run Social Security system versus personal retirement accounts (PRAs). First, it is widely recognized that the current government-run pay-as-you-go system is in serious trouble and cannot pay promised retirement benefits within the present tax structure. Second, it is widely acknowledged that the returns of the present system will be zero to negative for most of today's younger workers. As a result, trying to solve the Social Security problem by raising payroll taxes or postponing the retirement age, or both, ends up further reducing returns to today's workers and turns a bad deal into something much worse. Third, it is widely recognized that market-based returns to PRAs would produce returns that are three to five times higher than those promised by the government system. Returns on PRAs would be so high that, even when adjusted for risk, they would be far superior to the returns promised by the government-run system. 1
A remaining issue of concern involves the cost of administering a system of PRAs versus the cost of the current system. By several measures, the cost of administering the current Social Security system seems to be fairly low. Some observers have suggested that the cost of administering a system of PRAs would be far higher. A study by the Employee Benefit Research Institute (EBRI) suggests that various administrative issues relating to PRAs may make the accounts too complex to understand or too difficult for record keepers to administer. 2 EBRI's study is correct in raising many important
Originally published as Cato Institute Social Security Paper no. 15, March 9, 1999, and updated to reflect current information.