« Social Security truths I: The myth of the trust fund | Main | The Violence Box »

Social Security truths II: The myth of transition costs

In my previous post I wrote about some problems with the current Social Security system, and how private accounts, although not a panacea, can improve the situation. The most common criticism of partial privatization is the "transition cost" involved. If monies are diverted from the current system into private accounts, the logic goes, the difference will have to be made up until such time as the accounts start providing benefits of their own. These costs are often estimated at $2 trillion, and the implication is that we simply cannot "afford" the transition at this time, if ever.

The problem here is that these costs are in many ways as illusory as the trust fund itself. First of all, in order to have an honest comparison, we need also to consider the cost of doing nothing. For starters, we have the trust fund itself, which currently has a balance of about $1.5 trillion. As I pointed out previously, this is debt that will have to be repaid at some point.

The $1.5 trillion liability is just its present value, however. Add to that the $150 billion or so a year that comes from the FICA surplus, as well as the interest this debt accrues and compounds, and you're talking about a future liability totaling in the vicinity of $10 trillion (warning: PDF).

A move to private accounts can obviously lessen this liability, but the critics charge that it's a bad idea because the private accounts will begin costing us now even though they won't yield any benefits until later. Well, there's some truth to that, but let's examine it a little more closely.

Now is the perfect time to begin gradually phasing in private accounts, while FICA is still running large annual surpluses. Yes, diverting funds to private accounts will decrease the size of these surpluses, but is that necessarily a bad thing? Remember that the Social Security surpluses are immediately converted to government debt which must be paid back with interest in the future. It seems to me that private accounts would force us to face the true costs of the system sooner rather than later, as opposed to hiding them under a mountain of debt called a "trust fund."

Granted, diminished FICA surpluses would result in an increasing budget deficit. Still, this plan would have the benefit of facing the costs we know are coming sooner rather than later, while at the same time forcing us to be more candid about the true size of the federal deficit, which has long been distorted by the Social Security surplus.

Now don't get me wrong, there's no free lunch here. But for all the angst over "transition costs," it strikes me that they are nothing more than a different (and more honest) way of looking at Social Security's unfunded mandate.

All right, I'm off my soapbox now. I'm officially burned out on the whole issue, but I feel better having gotten that off my chest.


If you want to propose private accounts AND a lockbox, then you would make sense. Because if each worker could CHOOSE between putting a portion of their taxes in a lockbox or the account, then the money would be saved even if that worker chooses to stay within in the system. Your plan rewards the younger workers by putting aside money for their retirement that will begin 30-40 years from now. Meanwhile, the workers retiring over the next 20 years who wish to stay within the system will just see the day when outlays overrun revenues come that much sooner as a result of the private accounts draining revenue.

PE, the private accounts *are* lockboxes.

Yes, they are "lockboxes" for those that choose to leave the system. However, they are not lockboxes in the sense that Al Gore envisioned, a set aside of money for those who will be retiring and staying in the system.

If there was a lock box and a private account choice, then I could choose to set aside a portion of the SS tax that could've gone into a private account to go into the trust fund. That way, the social security trust fund would start to take on revenue in addition to government securities and the rest of the federal budget would have to balance without the revenue that we need to save for future retirements.

I am asking in complete ignorance, so please excuse the foolishness.

Why can't the WHOLE system be optional? (A one time choice to join or not)

I realize that you may have a problem in funding what is there now and the promises that have already been made (yet, I am not sure how that is reasonably measured on either side). But I would suspect that most would not opt out, if for anythign else because they don't know any better. Just a hunch.

But even if large masses did, it would seem that the money that is going back into peoples pockets is either going to go into other savings/investment accounts (we can hope so) or back into the economy itself, which in either case would seem to still provide a tax base for the government to be able to pay out to those who are in the system, especially if the "loxbox" is a true untouched reality.

Again, I am simply asking and recognize to my embarassment that I don't know enough to debate the topic, but have appreciated your insights Barry.

> Why can't the WHOLE system be optional? (A one time choice to join or not)

I think it's a damn good question, Malcolm. I think the same arguments would apply, since what Bush is offering amounts to a partial "opt-out." The point is, he's taking the more incremental approach. Far from being the radical revolution his critics are making it out to be, Bush's 4%-up-to-$1,000 plan is actually quite modest in scope.

Post a comment