The "Cost" of Privatization
By Arnold Kling
The Washington Post adds up the cost of President Bush’s campaign proposals. They include this:
An estimate from the Social Security actuary’s office, included in the 2001 report of a Social Security commission appointed by Bush, put the cost of adding private accounts to the government retirement program at $1.5 trillion over 10 years. With inflation, the figure would now be about $2 trillion. Much of the expense comes from continuing to pay most retirees at current benefit levels, at the same time that some payroll taxes are being diverted to the stock and bond market.
In fact, the cost of privatization is zero.
Look at it this way. There has been a brouhaha over accounting for stock options in private companies. Companies deny that options are an expense. But as Warren Buffett puts it, “If stock options are not compensation, then what are they? And if compensation is not an expense, then what is it?”
The promises to future Social Security recipients are to the government what stock options are to private companies–off-the-books costs. You could say, “If promised Social Security payments are not obligations of the U.S. government, then what are they? If an obligation of the U.S. government is not debt, then what is it?”
If we decided tomorrow to recognize Social Security promises as obligations, then this would be a huge “cost” in accounting terms, but no change in economic terms. That is what the “cost” of privatization is all about.
For more, see The Ultimate Lockbox.
For Discussion. Is it consistent to favor the expensing of stock options and yet treat the transition “cost” of Social Security privatization as a real cost?