Milton Friedman, winner of the Nobel Prize in Economics writes in the January 11, 1999 issue of the New York Times that the so-called transition cost from a pay-as-you-go system to a privatized system is in fact non-existent.
He explains it as follows :
"Taxes paid by today's workers are used to pay today's retirees. If money is left over, it finances other government spending - though, to maintain the insurance fiction, paper entries are created in a "trust fund" that is simultaneously an asset and a liability of the government.
When the benefits that are due exceed the proceeds from payroll taxes, as they will in the not very distant future, the difference will have to be financed by raisin taxes, borrowing, creating money, or reducing other government spending....
The assurance that workers will receive benefits when they retire ...depends solely on the expectation that future Congresses will honor promise made by earlier Congresses...
The present discounted value of the promises embedded in the Social Security law greatly exceeds the present discounted value of the expected proceeds from the payroll tax. The difference is an unfunded liability variously estimated at from $4 trillion to $11 trillion...
To see the phoniness of "transition costs" (the supposed net cost of privatizing the current Social Security system), consider the following thought experiment: As of January 1, 2000, the current Social Security system is repealed. To meet current commitments, every participant in the system will receive a government obligation equal to his or her actuarial share of unfunded liability.
For those already retired, that would be an obligation - a treasury bill or bond - with a market value equal to the present actuarial value of expected future benefits minus expected future payroll taxes, if any.
For everyone else, it would be an obligation due when the individual would have been eligible to receive benefits under the current system. And the maturity value would equal the present value of the benefits the person would have been entitled to, less the present value of the person's future tax liability, both adjusted for mortality.
The result would be a complete transition to a strictly private system, with every participant receiving what current law promises. Yet, aside from the cost of distributing the new obligations, the total funded and unfunded debt of the United States would not change one dollar. There are no "costs of transition". The unfunded liability would simply have become funded....
How would that funded debt be paid when it came due? By taxing, borrowing, creating money, or reducing other government spending. There are no other ways. There is no more reason to finance the repayment of this part of the funded debt by a payroll tax than any other part. Yet that is the implicit assumption of those who argue that the "cost of transition" mean there can only be partial privatization."
