Social Security Choice Paper No. 13

Facts and Fantasies about Transition Costs

By William G. Shipman
October 13, 1998

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.

Read the Full Social Security Choice Paper

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.