Cynical Nation

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.