RE: Transition to private accounts

[National Dialogue Moderator <moderator>]

One correspondent has asked about how our plan would deal with
issues of transition. I hope that this answer may be helpful.

The size of a "transition" is dependent upon the degree to which
the system moves from pay-as-you-go to advance funding.  It is
important to recognize that this is true whether or not there are
personal accounts.  If Social Security contributions are invested
in an instrument other than federal securities, then those monies
are no longer available to the federal government in order to
underwrite its current consumption.  This represents a sort of
"transition cost" to the federal government, which had otherwise
been counting on having access to that money.  But whether the new
investment is controlled by individuals, or directed by the
government, does not determine the fact or the size of the "transition
cost." The short-term cash-flow implications, as well as the
potential gains in reducing liabilties, are in proportion to the
degree of advance funding sought.  This is a critical point to
make, because there is a common misperception that personal accounts
somehow involve a "transition cost" that collective investment of
the Trust Fund would not.  Each takes revenue out of government
securities, and away from financing current operations.

Currently there is a surplus of approximately 2% of taxable payroll
in annual Social Security contributions, beyond what is needed to
fund benefits.  We have a choice before us as to whether this money
should be saved in the names of individual beneficiaries through
personal accounts, or whether it should be provided to the federal
government to offset its other consumption and borrowing.  This is
the only sense in which a 2% personal account plan involves a
"transition cost" in the short term.  Saving it directly for
individuals does deprive the government of access to it, but there
is no new money that has to be sought.  It is already coming in,
in the form of surplus Social Security contributions. (In the long
term, of course, the advance funding results in lower government
outlays, and thus there is no more transition cost at that point.)

If we wished to move to accounts that were significantly larger
than 2%, then additional transition costs would be faced.  The sum
of current benefit obligations and accounts equal to 3% or 4% of
national taxable payroll would be greater than can be afforded from
within the current combined OASDI tax of 12.4%.  Other means would
need to be found to simultaneously meet the obligations of funding
the personal accounts and paying current benefits.  I do not
necessarily oppose moving to a larger degree of advance funding,
but it is also true that our decision to use the 2% figure was to
a certain degree influenced by what could be funded from within
the current tax rate.

     Senator Judd Gregg