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An Appeal for Honesty
There are two arguments in the Social Security debate I'm tired of hearing.
The first is that the transition costs are simply the result of taking an already-accrued liability and making it explicit in the bookkeeping, with the implication that they're therefore harmless.
The second is that the transition costs will hugely increase the national debt, with the implication that they're therefore horrible.
The nice thing about being on the political fringe is that sometimes, like now, I get to cry foul against both sides simultaneously.
Here's the reality of the transition costs. Because the Social Security system is presently running a surplus, the transition costs would decrease the magnitude of the surplus. Because the surplus is invested in Treasury bonds, the surplus (and the trust fund) is merely a bookkeeping entity without any economic significance — all the money winds up in the General Fund.
A reduced Social Security surplus means a reduced General Fund. Assuming the government will not reduce spending in response to the smaller surplus (which I think is a very reasonable assumption), the necessary funds will be obtained by borrowing from the public. In the simplest scenario, the funds going into private accounts will be exactly offset by new government borrowing, so there is no net effect.
In the short run.
Government borrowing from the public is different from government "borrowing" from the Social Security trust fund. The interest on the trust fund bonds is an accounting fiction, but the interest paid on the debt to the public is real. The true measure of the transition costs is these interest payments. (Alternately, tax increases.)
If Social Security were not changed, the borrowing (or higher taxes) would occur in the future as the (fictional, mind you) trust fund bonds are paid. Privatization makes it occur sooner. This is the real transition cost — the government's recouping of the tax revenue that no longer becomes part of the General Fund.
The pro-reform argument that the transition costs are harmless is a lie. The transition costs are quite real from the point of view of the government.
Do the transition costs hurt the economy? No. They are neutral. The government must raise additional funds to pay the interest, but the interest goes back to the public, so it's a wash on an aggregate basis. The transition costs could benefit the economy if the larger General Fund deficit leads to a reduction in government spending, "starve-the-beast" style, although I remain skeptical that this actually happens despite the popularity of the idea.
The anti-reform argument that the transition costs are horrible is also a lie. The transition costs increase the deficit in the short run, but do not affect the debt because they essentially, as the pro-reform argument goes, are taking an off-balance-sheet accrued liability and making it explicit. If the government's budgeting was done on an accrual rather than cash-flow basis, the huge figures thrown about for the "unfunded liability" would already be included in the debt figures. (Albeit, as estimates.)
Pro-reformers: Stop pretending that the transition costs are harmless. The government will tax or borrow that amount, plus more to cover interest. The number of dollars flowing through government hands will actually increase. You need to recognize that this will create pressure for a tax increase.
Anti-reformers: Stop pretending that the transition costs will increase the debt. It ain't so. The additional borrowing in the near term is offset by a reduction in the accrued liability. It only looks like the transition costs increase the debt because the liability is off-the-books.
Everybody: I still want to opt out. Ya'll can do whatever you want to the Social Security system after you let me out. You never should have forced me into this in the first place — I'm the complaining type…