WSJ makes transition costs disappear

In an editorial condemning an increase in the cap on income subject to the payroll tax, the Wall Street Journal continues to pass off the false comparison between currently legislated Social Security benefits and estimated benefits from private accounts. Consider this graphic, which runs alongside the editorial:

The problem is that there is no such free lunch. Moving to private accounts would incur trillions of dollars in transition costs because workers' contributions would be diverted from the Social Security trust fund into private accounts. That's why the Bush administration proposed a "clawback" that would reduce your traditional benefit by the number of dollars contributed to your private account plus 3% interest above inflation annually. Such a mechanism would vastly reduce the gains from private accounts.

Comments

[Steve Verdon]

Perhaps you should read Arnold Kling's take on this. The transition cost argument is bogus.

http://www.techcentralstation.com/012104H.html

The reasoning is as follows:

Under the current setup:

Obligations to todays retirees: Todays Workers/Taxpayers

Obligations to future retirees: Future Workers/Taxpayers.

Under some sort of privatized scheme:

Obligations to todays retirees: Future Workers/Taxpayers

Obligations to future retirees: Today's Workers/Taxpayers.

From Arnold Kling's article:

Under 100 percent privatization, or under any transition from today's "pay as you go" system to a fully-funded system, today's payroll taxes would not go to pay current benefits, but instead would be used to fund the retirement benefits of today's workers. As a result, the government would have to find another source of revenue to pay current retirees. In practice, this means that the government would issue debt, putting the burden of repaying that debt onto future taxpayers.

A complete privatization plan is a swap: instead of having future taxpayers fund the obligation to pay today's workers when they retire, future taxpayers would fund current retirees. Conversely, instead of requiring today's workers to pay for today's retirees, today's workers would take care of their own retirement.

[Brendan Nyhan]

The transition cost argument is not "bogus." If taking care of the problem were easy, Steve, the administration would have done it. But the reality is that issuing trillions of dollars in new debt is not something that is politically or economically advisable, especially given the fiscal crunch we already face in coming years due to the retirement of baby boomers.