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October 13, 1998

SSP No. 13

Facts and Fantasies about

Transition Costs

by William Shipman

including the costs of meeting those unfunded

Executive Summary

liabilities.

ne of the more common concerns about

O

The mechanisms for paying those costs

transforming Social Security's pay-as-you-

remain the same whether one attempts to prop

go financing into a market-based structure is the

up the existing system or shift to a new,

transition cost. Critics claim that people would

market-based system--debt, additional revenue,

be unduly burdened because they would have to

reductions in spending within the program, or

pay twice--once for their own retirement and

reductions in spending elsewhere in the govern-

once for those already retired. This double

ment. Regardless of the mechanism used to pay

expense would be so prohibitive, it is argued, as

those costs, moving to a market-based system

to warrant rejecting privatization even if it were

will always be less costly than attempting to pre-

meritorious on other grounds.

serve the current system.

Such arguments ignore the enormous

Therefore, redesigning Social Security as a

unfunded liabilities of the current Social

market-based system of personally owned

Security system. Any valid discussion of the

retirement accounts does not actually entail any

costs of moving to a market-based Social

new costs. Indeed, moving to a market-based

Security system must compare those costs with

system can ultimately result in substantial

the costs of maintaining the current system,

savings.

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.

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