How cheap is social security



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How cheap is social security?

One criticism provided by those against privatizing social security is that the private mutual funds are much more expensive then social security is. It is true that the average mutual fund charges fees (expense ratios) of about 1.52% of assets. However, a far better measure of the real cost of a privatized system would be a massive, indexed mutual fund with an expense of .18% (Vanguard) or the plan available to a couple of million federal employees, of .05% (the Thrift Savings Plan). Now as far as I can tell, the expense ratio of the social security system is about .21% of assets (.6% of revenue). So not only is this rate worse than private funds, it doesn’t even measure the expenses not paid for by the SSA, like the compliance, tax and administration costs of employers. Would there be costs of employer compliance if these funds ran like social security? Sure. Would expenses go up some if there were many small accounts? It would be likely, but let’s not pretend that the current system is a paragon of frugality.

Now it was pointed out to me that some of the costs of social security are actually spent on disbility insurance benefits and trusts, which would have to be paid anyway, and may be more expensive to administer due to an even smaller average account size and more fraud. We may have to shave a few points off their expenses. Disability payments are about 19% of payments, so let’s assume they are half the expense. The private funds are still cheaper.

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