Wednesday, April 06, 2005
Social Security private account "transition cost" thought experiment.
Let us imagine that Social Security continues into the future operating exactly as it does today, with just one exception: the US government bonds that currently are deposited in the trust fund are distributed among individual private accounts created for Social Security participants instead, substituting for benefit promises of equal value -- the same benefits the bonds would finance under the status quo. Going forward, additional government bonds that would be deposited in the trust fund under the status quo system are allocated to private accounts as well.
Compared to the current system the change in government tax revenue is $0, there is no change in the government's use of its tax revenue, and there is $0 change in the government's liability on its bonds issued to finance future benefits.
Is there any "transition cost" to the government in creating such private accounts funded with the goverment bonds?
If yes, identify what it is. If "no", proceed...
Now, given that such private accounts holding government bonds exist, let us assume that individual account owners are free to voluntarily swap their bonds for other investments (stocks, corporate bonds, bank CDs, whatever) of equal value. Of course, this leaves the total amount of such bonds that have been issued totally unchagned -- only their owners change.
Again, compared to today's current system the change in government tax revenue is $0, the government's use of its revenue remains totally unchanged, and there is $0 change in the government's liability on its bonds issued to finance future benefits.
Is there any "transition cost" to the government entailed in such swaps that result in the creation of private accounts funded with market investments?
These questions are inspired by a new proposal for structuring private accounts put forth by Alex J. Pollock.
Let us imagine that Social Security continues into the future operating exactly as it does today, with just one exception: the US government bonds that currently are deposited in the trust fund are distributed among individual private accounts created for Social Security participants instead, substituting for benefit promises of equal value -- the same benefits the bonds would finance under the status quo. Going forward, additional government bonds that would be deposited in the trust fund under the status quo system are allocated to private accounts as well.
Compared to the current system the change in government tax revenue is $0, there is no change in the government's use of its tax revenue, and there is $0 change in the government's liability on its bonds issued to finance future benefits.
Is there any "transition cost" to the government in creating such private accounts funded with the goverment bonds?
If yes, identify what it is. If "no", proceed...
Now, given that such private accounts holding government bonds exist, let us assume that individual account owners are free to voluntarily swap their bonds for other investments (stocks, corporate bonds, bank CDs, whatever) of equal value. Of course, this leaves the total amount of such bonds that have been issued totally unchagned -- only their owners change.
Again, compared to today's current system the change in government tax revenue is $0, the government's use of its revenue remains totally unchanged, and there is $0 change in the government's liability on its bonds issued to finance future benefits.
Is there any "transition cost" to the government entailed in such swaps that result in the creation of private accounts funded with market investments?
These questions are inspired by a new proposal for structuring private accounts put forth by Alex J. Pollock.
