Scrivener.net

Thursday, June 23, 2005

Social Security thought experiment becomes reality.

You read it here first, folks...
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 [...]

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 government 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 unchanged -- 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?...
Today's Wall Street Journal describes the new Social Security reform proposal coming from the Republicans...
Wisconsin Congressman Paul Ryan and South Carolina Senator Jim DeMint are calling for legislation to ... allow workers to create individual personal retirement accounts and place marketable government bonds worth their portion of the Social Security surplus into these accounts. Think of this as creating 140 million "lock box" accounts for every American worker.

After three years, workers could trade these Treasury bonds and invest instead in higher-return mutual funds containing a combination of corporate stocks and bonds.

We're talking big dollars for most families ... [Social Security] will continue to run surpluses of about $1.2 trillion through 2016 on a cash basis, and some $3 trillion through 2026 if interest on that cash is also counted ...

...by investing only surplus payroll taxes into private accounts, the proposal blunts the (specious but politically potent) attacks from AARP and the left that personal accounts will endanger the program's solvency...
Go DeMint-Ryan!