News Release

July 12, 2005

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The Cost Of Status Quo Greater Than Cost Of Social Security Reform
The transition cost of reform not as opponents claim

WASHINGTON -- When President Bush announced his plan to reform Social Security by including personal accounts, opponents trumpeted the potential high cost of transition. True, the changeover to individual accounts would result in increased short-term deficits, but those won't represent a "new" cost. Higher short-term deficits would be matched by reduced future Social Security outlays, potentially improving the program's financial position, according to a new study by the Cato Institute.

In "Social Security Status Quo versus Reform: What's the Trade-off?," Jagadeesh Gokhale, a Cato senior fellow, criticizes reform opponents' argument that personal accounts would lead to an additional debt needed to pay current retirees, which "would likely give rise to negative reactions on the part of financial markets" and thus cause personal accounts to be exceedingly costly.

Gokhale argues that the Bush administration's "latest proposals to gradually introduce personal accounts beginning in 2009 would cause a relatively small increase in federal debt" ($273 billion measured in present value as of 2005), and that increase "would be matched by an equal or greater injection of funds in private markets."

The author also points out that "a carefully crafted system of personal accounts would improve labor market incentives, making the economy better positioned to fulfill the needs of an aging population."

Based on recent studies concluding that the Social Security Trust Fund is an unproductive means for saving to pay future Social Security benefits, Gokhale suggests that personal accounts may be more effective in saving resources for future needs. He advocates against delaying reforms because postponement entails huge and growing financial costs. He warns that "runaway growth in Social Security's financial short-fall under today's policies and institutions is likely to ensure higher tax rates and more adverse developments in labor and financial markets in the future."

Social Security Choice Paper no. 35