Myths and Misperceptions

Transition Costs are an Investment

The Administration, in its effort to rush to privatized accounts, claims that the estimated $2 trillion needed to fund the transition is actually an investment in solving the Social Security "problem." that will eventually be recovered.

That claim is false. Transition costs to privatization are an expense that will not be recovered from privatization, itself. Although other, independant changes will bring Social Security back into balance and produce savings, privatization alone will have no effect.

The claim is that, by being able to invest in a portfolio that has a higher return than the one in which the Social Security trust funds are invested, individuals will shift to privatized accounts. reducing the future payouts from the trust funds (not to mention that, under the Presidential Commission's Plan 2, the benefits paid from the Trust Fund (non-privatized portion of savings are further reduced by a portion of the assumed gain in the privatized account.)

This argument is specious, because it rests on a claim that, while valid, has nothing to do with privatization -- the change in investment portfolios.

Let's assume that either a) the Social security Administration is permitted to invest it's surplus on a mix of high-grade growth stocks, investment grade corporate bonds and government debt, or b) that privatized accounts must be invested solely in government debt.

In either situation, the return on investment for both the Trust fund and private account are equal. Because the Trust Fund is larger, it actually has less "risk," since it has a sufficient assets to better withstand downturns in the market and if put back into actuarial balance (the objective of any change), need not liquidate any significant portion of those assets at any time, little less a specific time. Further, the administrative costs of a publicly administered fund are lower than those of privately managed ones (not need for profits or marking costs, at a minimum) meaning that a greater portion of any gains are retained as assets.

Under those conditions, there is no incentive (only disincentive) to remove money from the common fund and place it in a private one, so privatization, per se, produces no incentive in an individual's rational decision to move funds to a private account. And, therefore, no future benefit to the system from which to claim a "recovery" of the costs of transitioning to privatization.

Again, all the overall cost benefits come from the assumptions the private account may be invested in a wider portfolio and the government one may not.

In fact, when the CBO analyzed the Presidential Commission's Plan 2, it listed four long term cost savings -- the only beefit from "privatization" came from the "penalties" applied to the basic )traditional) benefits on the assumption the privatized accounts had a higher rate of return (and that return is incomsequential, compared to the costs, and imputed interest, on the transition.)

Without evidence, claiming that privatization itself provides a benefit and attributing future savings from privatization to pay of the costs of transiting to a privatized system is, simply, a specious claim.