LETTERS to the editor
Pension plan costs
Estelle James and Robert Palacios have given an excellent discussion of the problem involved in measuring the administrative expenses of pension plans (“Costs of Administering Public and Private Pension Plans,” Finance & Development, June 1995). I agree that meaningful comparisons between plans are difficult to achieve because of such differing elements as relative maturity of the plan and the method of funding.
Nonetheless, I believe that an adequate and proper measure of relative administrative expenses is to express the latter as a percentage of contribution income. This is especially so for a relatively mature system like the Old- Age, Survivors, and Disability Insurance program of the United States (OASDI) and, to a considerable extent, for a fully funded system like that of Chile. In Chile’s case, however, the ratio of administrative expenses to contributions (which are at a level rate for the future) tends to be on the low side, because so few members of the plan are receiving periodic retirement benefits.
The authors point out that the administrative expenses of a privatized plan like that of Chile are artificially higher because of the investment expenses needed to produce the higher rates of return from investment in private securities. However, proper accounting procedure under these circumstances is not to count the expenses involved with investments as administrative expenses but, rather, to offset them against investment income to yield net investment income. This procedure is followed, for example, by the United Nations Joint Staff Pension Fund.
The authors state that the administrative expenses of the OASDI system are understated because the costs of the Internal Revenue Service in collecting contributions and enforcing coverage compliance are not included. This is not correct because such expenses are reimbursed from the trust funds—as are the costs of the Department of the Treasury and the Postal Service in paying the benefits, as well as other costs, such as rental for government-owned buildings used for field operations. In the year ended September 30,1994, the trust funds paid administrative expenses of $2,897 million, or 0.85 percent of net contributions- $204 million of this was paid to the Department of the Treasury, of which the Internal Revenue Service is a constituent (1995 OASDI Trustees Report, House Document 104-57, April 3, 1995, page 51). That administrative-expense ratio is properly comparable with the roughly 12 percent for the Chilean system.
Robert J. Myers
Former Chief Actuary US Social Security Administration (1947-70)
Former Deputy Commissioner US Social Security Administration (1981-82)
The old-age crisis
I refer to the article “Averting the Old-Age Crisis” by Estelle James in Finance & Development, June 1995. The problem being addressed in the article is the increase in the average age of the population and how to handle the financing of pensions for this part of the population equitably.
What I want to point out is that the cause of the increase in the percentage of older people in a population is a decrease in the birth rate. If this lower birth rate stays constant, a plateau is eventually reached, which, depending on what the birth rate is, may be a shrinking, constant, or growing population. In any case, the problem addressed in the article is, relatively speaking, short term (50 to 100 years). This is not to say that the problem of financing pensions for a large aging population is not a pressing problem. However, assuming the world is suffering from overpopulation, then a decrease in the birth rate, although it has caused a short-term problem of financing pensions for old people, will, in the long term, bring about an improvement in the overpopulation situation.
Robert Silberstorf Medellin, Colombia
Transition: the right course?
Reading all five articles on transition economies that appeared in the September 1995 issue of Finance & Development does nothing to alter the unscientific impression I have gained from reading the daily press since the start of the shift from command to market economies: the so-called Western powers have been egregiously callous, optimistic, and cruel in the strategy they have followed in helping (more or less) the transition economies to cope with the enormous structural adjustments they have faced, and the equally daunting psychological adjustments this has involved for their residents.
Even in a sophisticated and experienced market economy, a major structural adjustment takes a long time, and requires cushioning measures by the government, or by the country’s trading partners, or both. Leaving it all to the leisurely functioning of the marketplace would involve painful and “unnecessary suffering by many members of the public. For example, recall the problems faced by Britain and other war-ravaged economies in adjusting from wartime to peacetime conditions in 1945, and the combined efforts of their domestic authorities and the international community to effect a smooth transition. A major part, but only a part, of those efforts was the establishment of the International Bank for Reconstruction and Development and the International Monetary Fund. (Be it noted that wartime conditions had brought a substantial element of “command” economics to these countries, including rationing, direct controls, exchange controls, and Article XIV of the Fund agreement—which, if I am not mistaken, some countries still claim the benefit of 50 years after the end of the war.)
The command economies faced serious postwar adjustment problems in 1945, too, of course, but not that of a substantial change in the instruments of economic management. However, the problems they have recently faced in converting to market economies were second only to those of the war-ravaged market economies in 1945, without counting the psychological adjustments required of the public in moving to the full rigors of a system in which the price mechanism was to become the determining force in resource allocation instead of just a rather unsatisfactory guide to consumer behavior.
The help given by the international community, often grudgingly, seemed to be guided for the most part by a philosophy that can only be compared to teaching someone to swim by throwing him (or her) into deep water and leaving him to fend for himself, laced with admonitions to be more democratic or have the grudging aid withheld. (True democracy can only grow with experience over time—it is not instantly realized by having the president elected by popular vote.)
I see no evidence of a rational assessment by the international community of what changes need to be made, how to effect them gradually while maintaining real output (and real income), and what cushioning devices would be necessary to deal with the inevitable mishaps and miscalculations. All I see is a few ad hoc measures of help, focused on corporate governance, banking reform, fiscal procedures, and the like—all very useful in themselves, but not incorporated in a coordinated plan.
Or am I way out in left field? Does the neo- classicism that seems to have pre-empted economic thought these days hold that Britain and other war-ravaged economies ought to have been thrown into deep water in 1945 and left to sink or swim on their own?
Professor Alex N. McLeod ThornhiU, Ontario Canada
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