RE: The Myth of Transition Cost

["Steven H. Johnson" <info@sscommonsense.org>]

Andre Dermant's quote from Milton Friedman ends with the 
implied observation that full privatization would be possible
if only we weren't hung up on the issue of transition costs.

Transition costs aren't the fundamental obstacle to full 
privatization.  The fundamental obstacle is the fact that America's
financial markets simply aren't big enough to replace the entire
job that Social Security will be expected to do, once the "65
and over" crowd becomes 23% of the entire population, as forecast,
not just 12%, as it is today.

If Social Security owned 100% of the entire stock market today,
the dividend flow from publicly held corporations would cover
barely half of Social Security's current obligations.  If, to
borrow a term from Friedman, we were to do a thought experiment,
and imagine that we had the same size retiree population today
that we're expected to have in the next 75 years, the total
dividend flow would barely be enough to cover a third of Social
Security's obligations to our retirees.

Another way to look at it is to calculate the size of the capital
pool that would be needed to fully cover Social Security's 
future obligations to retirees, if the system were fully
privatized.  Depending on the assumptions one makes about future
rates of return, the total capital pool has to be somewhere in
the vicinity of 120% of GDP to 130% of GDP.  On average, the 
stock market's total capitalization relative to GDP has been only
65%.  Private accounts worth 120% of GDP?  Average stock market
capitalization, over the past 75 years, at only 65% of GDP?
It doesn't take a rocket scientist to recognize the fallacy
here.  Total privatization works only if one is willing to have 
private accounts soak up nearly all of the stocks on the U.S. stock
market.

That's the obstacle to total privatization.  The stock market
can't handle the whole task, and have anything left over for 
anybody else.  Transition costs have nothing to do with it.

-Steve Johnson.