| SSP No. 13 |
October 13, 1998
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Facts and Fantasies about Transition Costs
by William Shipman
William Shipman is a principal with State Street Global Advisors
and co-author of Promises to Keep: Saving Social Security’s Dream. He is co-chairman
of the Cato Institute’s Project on Social Security Privatization.
Executive Summary
One of the more common concerns about transforming Social Security’s pay-as-you-go
financing into a market-based structure is the transition cost. Critics claim
that people would be unduly burdened because they would have to pay twice—once
for their own retirement and once for those already retired. This double expense
would be so prohibitive, it is argued, as to warrant rejecting privatization
even if it were meritorious on other grounds.
Such arguments ignore the enormous unfunded liabilities of the
current Social Security system. Any valid discussion of the costs of moving
to a market-based Social Security system must compare those costs with the costs
of maintaining the current system, including the costs of meeting those unfunded
liabilities.
The mechanisms for paying those costs remain the same whether
one attempts to prop up the existing system or shift to a new, market-based
system—debt, additional revenue, reductions in spending within the program,
or reductions in spending elsewhere in the government. Regardless of the mechanism
used to pay those costs, moving to a market-based system will always be less
costly than attempting to preserve the current system.
Therefore, redesigning Social Security as a market-based system
of personally owned retirement accounts does not actually entail any new costs.
Indeed, moving to a market-based system can ultimately result in substantial
savings.
Index of Social Security Choice Papers
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