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Some questions have easy answers

It just struck me that I know the answer to at least one question which surely must have puzzled at least a few people with respect to the Social Security debate in the USA.

Q: Why are the “administration costs” so much higher for private sector pension plans than SS? Isn’t it at least a little bit strange for a government program to have so much lower deadweight cost than a private sector one?

A: “Administration costs” is a euphemism; most of the difference between the cost of SS and the cost of a private pension plan is the commission paid to the adviser who sold the plan. These commissions are quite material and the costs are, of course, borne by the consumer in the final analysis (as I used to point out to graduate trainees, retail customers have to bear the cost of everything in the financial sector as they are the only ones who go out and work for a living).

There you go. If anyone else has a couple of “easy answers” like this, post ’em on your blog.

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