As support grows for transforming Social Security from a pay-as-you-go defined benefit program to a system of individually owned, privately invested accounts, critics of privatization have warned that making the transition to such a new system would impose substantial new costs on today’ s young workers. However, given a proper understanding of Social Security’s current unfunded liabilities — variously estimated at from $4 trillion to $11 trillion — there are no real transition costs to privatizing Social Security, merely the explicit recognition of current implicit debt.
A privatized Social Security system should not be mandatory. The fraction of a person’s income that it is reasonable for him or her to set aside for retirement depends on that person’s circumstances and values. It makes no more sense to specify a minimum fraction for all people than to mandate a minimum fraction of income that must be spent on housing or transportation. Our general presumption is that individuals can best judge for themselves how to use their resources. The ongoing discussion about privatizing Social Security would benefit from paying more attention to fundamentals, rather than dwelling simply on nuts and bolts of privatization.
FOR FULL REPORT LINK TO: Briefing Paper No. 46 (PDF format, 3 pp. 29 Kb)