January 19, 2005

The lie of Social Security “transition costs”

Lawrence A. Hunter:

In Social Security, the current generation of workers pre-funds its retirement benefits by making contributions to the program in the form of a tax taken out of every paycheck. In exchange for this tax, the government promises to pay the taxpayer, when he retires, precisely defined benefits, which are specified in law by formula.

The amount of money paid in payroll taxes would be more than adequate to pre-fund workers’ retirement benefits were it properly invested, but it is not. In effect, the federal government borrows the payroll tax payments of current workers to pay the retirement benefits to current retirees. But unlike ordinary government debt, the debt obligation owed to workers through Social Security is not quantified and memorialized by the issuance of bond, note, or bill certificates to the workers. Nor is it formally recorded as debt on the balance sheet of the U.S. government. It is real debt nonetheless.

What pundits have labeled the “transition cost,” is really the short-term cash-flow crunch that will happen when workers are allowed to invest a part of their Social Security taxes in personal retirement accounts rather than loan that money to the government to pay the benefits of current retirees.


This cash-flow problem, however, does not arise because personal accounts create new (i.e., “transition”) costs. To the contrary, the cash-flow problem arises because the government would be borrowing less. Every dollar of a worker’s Social Security payroll tax contribution invested in a personal retirement account is a dollar less debt the government owes to the worker and would otherwise have to pay back in the form of future Social Security benefits.

The above URL may require a paid subscription. Mr. Hunter’s essay on Human Events is a shortened version of one he wrote for the Institute for Policy Innovation, but I have yet to find it.

Posted by retrophisch at January 19, 2005 04:46 PM | TrackBack