Social Security Transition Cost
By Arnold Kling
Responding to a comment on the previous post, I write,
Suppose that your house has a very dilapidated roof. The next big winter storm is likely to cause huge damage unless it is repaired. So you borrow $20,000 and fix the roof.
What is the cost of this transaction? The “cash flow cost” is that you have to pay back the loan. Until you complete the payments, you will have less money available to buy a fancy home theater system or a new Jacuzzi.
The economic cost of this transaction may be zero. In an economic sense, you have exchanged a certain, visible cost — the cost of repaying the loan — for an uncertain, invisible cost — the cost of trying to get through winter with a dilapidated roof. Chances are, if you did not fix the roof, you would still not be able to afford the home theater system or the Jacuzzi, because a storm could cause water damage and force you to pay huge repair bills.
…There are serious decisions to be made concerning the best mix of methods to finance the transition that extinguishes Social Security’s unfunded liability. Borrowing all of the money to fund the transition is probably not the best choice. But the economic costs of the status quo are, if anything, worse than a transition financed 100 percent by borrowing. If spencer or his father-in-law were to complain about the cost of fixing the roof, I would remind them that the cost of not fixing the roof is at least as great.
For Discussion. How would various methods of funding a transition to privatization affect intergenerational fairness?