Skip to comments.Social Security 'Transition Costs' a Myth, Say Economists
Posted on 02/21/2005 8:34:41 AM PST by dcnd9
By Jeff Johnson CNSNews.com Senior Staff Writer February 21, 2005
(CNSNews.com) - Transition costs, trumpeted by Democrats as a chief reason not to support President Bush's Social Security reforms, are a myth, according to several prominent economists, including the 2004 Nobel Prize winner.
The trillion dollar totals that Democrats cite as "transition costs" are actually the amount the government is borrowing to pay current Social Security benefits combined with the massive debt already owed to the so-called Social Security "Trust Fund."
"We hear a lot about transition costs," Arizona State University professor Edward Prescott, 2004 winner of the Bank of Sweden Nobel Prize in Economics, said. "But I'm going to use some economic jargon, not 'political accounting' jargon.
"There are no transition costs," Prescott said at the Cato Institute Feb, 9. "Re-labeling debt is not a cost." Read more@ http://www.cnsnews.com/ViewSpecialReports.asp?Page=\SpecialReports\archive\200502\SPE20050221a.html
I have not crunched the numbers myself. However, we have a huge unfunded liability in future SS payments. It always struck me that what is going on here is simply forcing the government to recognize part of that liability earlier than they otherwise would.
It seems it's all a myth till they get in and start to change things, like the Medicare program the figure was lowball at first. an wound up costing MORE than originally thought.
Lets put this into perspective. Let's use the Social Security approach in a much reduced example. Assume for the moment I want a bass boat, and I am a Democratic politician.
So I convince my wife and my 3 kids that we need to save money for their college education, because I won't be earning enough money to have all 3 kids in college at the same time. We don't trust either the stock market (after all, it is so risky) or even banks (after all, banks fail), so we decide to just put our savings into a jar.
Every month, we put cash money into a jar -- some from my job, some from her job, and some from the kids who work weekends and in the summer.
At the end of the year, I withdraw the cash, put in a note promising to pay 6% interest, and I go buy my bass boat.
Life is good.
The following year, I trade in the boat and buy a bigger boat with cash from the savings fund, putting in another note paying 6% interest. Life is better.
I continue this process for 6 years. I take the kids fishing when they are old enough, and they think I am cool.
Then the first kid goes to college. I pay for this by diverting money from the savings fund -- and take the cash that is left over and buy a bigger engine for the boat.
One year later, the 2nd kid goes to college. Now almost all the savings money is going to pay for college for the 2 kids, but there is enough to buy a deluxe fishing rod when I put in another note.
When the third kid goes to college, there isn't enough money going in every month to pay for it. So my wife says, just take money out of the fund to pay for the 3rd kid. We go to the jar, and there isn't any cash - just the notes.
"Here", sez I, "we can use these notes."
The wife looks at me, aghast! "Where is the money?"
"But this is better then money -- my notes pay 6% interest!"
They try to explain to me that there isn't enough money to pay for living expenses, college for 2 kids, and redeem the notes to allow the 3rd kid to enter college.
I tell them that they have a real problem, but there are lots of potential solutions -- one of them will have to drop out, or all 3 of them will have to take a part time job; but I'm going fishing.
The "transition costs" are mostly the actual reduction of revenue flow to the US Treasury, by whatever the amount of the FICA tax that is diverted to the private account system.
The upshot would be a SHORTER period before the net surplus of funds coming in from FICA is reduced to FICA income = Social Security outgo. Anytime after that point, of course, the general funds have to be taken from other purposes and paid out as SS benefits. Two things may be done then: either reduce the benefit paid, and expect the difference to be made up by the private portion of the account, or raise the general level of other taxation to make up the shortfall without deficit spending. Otherwise the borrowing against our future continues unabated. Of these choices, only one is fiscally responsible, and the reactionaries in Congress seem not able to make the connection.
Medicare, of course, will collapse much sooner than Social Security.
By law the Social Security cash flow "surplus" (net of current SocSecurity payouts!) is "invested" in "safe" government bonds. But "government bonds" are obligations of the government and would if cashed merely transfer the obligation back to the Treasury. The government can write IOUs to itself as readily as you can write IOUs to yourself - and it has exactly the same economic meaning in both cases. Namely, nothing at all. Which is why the SS "Trust Fund" cannot possibly ameliorate the inflationary pressure which will be brought about by the payment of Social Security by the government to the retirement boom which was always implied in the post-war Baby Boom.
In reality of course, it is the real economy and not the government which will produce and pay for the goods and services absorbed by the retirement boom - and the only issue is the accounting mechanisms which will distribute the burden on the economy of the retirement boom. I have shown that the method presently enshrined in law is a boondoggle which daily implies a more intolerable burden on our grandchildren in a decade or so; even actually investing the SSTF by paying down government debt is risky because that would be nothing other than an abrupt contraction of the money supply which presumably would cause a recession or even a depression. The only aparent way to invest the money on that scale is to use it to buy private obligations such as mortgages, corporate bonds, and stocks.
But for the government to invest hundreds of billions in such private obligations would be a huge gravy train in its own right - a vast canvas upon which the government would prove Adam Smith's dictum that no one - least of all, no one who thinks himself competent to do so - should be empowered by the government to invest other people's money. Furthermore, if the government were to invest in stocks in its own name, it would have an excuse, and an overwhelming temptation, to intrude into corporate boards of directors.
Bottom Line: SocSecurity needs to be based frimly on private accounts and private control of investment.
As a CPA, if I saw a company doing "off-balance sheet financing" by not recording all of its obligations, I would not give it a clean opinion. The government has had a humongous unrecorded liability and it's getting worse.
another Nobel winner in economics said the same thing
back in 1999 :Milton Friedman.
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