Updates from Chicago Booth

Can we save retirement?
What the US and other countries can learn about social security reform
By Alex Verkhivker – When it comes to pension crises, American workers are not alone. In the United Kingdom, many of the country’s almost 6,000 employer-sponsored, defined-benefit programs are underfunded.

In Greece, Poland, and across the European continent, a demographic mismatch means there are not enough incoming taxes to fund promised payouts.

Privatization is often suggested as a solution to pension crises. Rather than have governments or employers fund workers’ retirements, why not give retirees more control over funding their retirements, with private individual accounts?

Many critics of privatization are quick to point to Chile as a cautionary tale. The Chilean government privatized its pension system in 1980, its secretary of labor and social security inspired by Milton Friedman’s book Capitalism and Freedom.

In Mexico, money is automatically deducted from workers’ wages and placed in individual accounts. Then individuals choose from a menu of assets in which to invest and work through regulated, professional money managers, each of which offers a single investment product.

But competition did not materialize as the government had hoped it would. Hastings, Hortaçsu, and Syverson looked at where investors lived, which fund managers they invested with, how much money they saved—and earned after fees. They find that while many people expected competition to drive down costs, the average asset-weighted load was a steep 23 percent, and balance fees were another 0.63 percent. Those fees ate away—a lot—at returns. more> https://goo.gl/usSmNP

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