Here is the relevant quote from the plan:
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Here is an example to demonstrate the analysis just given. Assume a Social Security system in the year of reform with $100 billion in revenues and $100 billion in benefit expenditures. Suppose the workers invested the $100 billion in revenues in a private system instead.
Now suppose that to obtain the funds to finance outstanding benefit obligations, the government cut spending on other programs by $100 billion. The result is $100 billion in increased savings, through the private system. Moreover, the $100 billion in reduced government spending involves forgone present consumption, by society as a whole and not just current workers, of $100 billion as well. The cost of the transition is simply the cost of the increased savings, which is the same as the cost of any other savings increase—forgone present consumption equal to the amount of the savings increase. Moreover, to the extent that the reform generated efficiency gains and stimulated greater economic growth, that would offset the forgone present consumption, reducing the cost of the savings increase.
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As the plan indicates, the cost of the transition is the cost of the increased savings, and thus no change in the inflation pressure is experienced. On the contrary, less dollars in the economy buying the same amount of products produces a reduction in prices across the board. Moreover, the availability of larger capital stocks stimulates the economy by a) companies having more money to fund R&D; projects; b) companies having more money to expand their operations; etc.
Of course, there can be dark sides to this picture, deflation could be one; prices drop uncontrollably; thus, causing companies to not realize their expected revenues and causing an economic meltdown; however, experience tells us that is a very unlikely scenario.
In any case, under an unfuded system, the government assumes the risk during economic crisis, and, thus, when hard economic times hit us again higher income and payroll taxes will be needed to fill the shortfall of revenues created by the unemployed workforce.
So, anyway you look at it, an economic calamity will always be bad, whether the government assumes the risk or individuals assume the risk; in any case, government assuming the risk is a misnomer because the government doesn't generate wealth and, thus, risks nothing; taxpayers, on the other hand, hold the wealth that the government takes away for its benevolent purposes.
I all cases, when the government becomes smaller by $100B of reduced government spending, besides being a drop-in-the-bucket, taxpayers will basically feel like they received a tax-cut. Last years, $90B tax-cut had no negative effect for the economy that I know of, on the contrary many can argue that it added additional fuel to the economy.
The federal budget for the past few years has remained at the same level, $1.7T; indicating that no new spending by the government has been made and no adverse effect to the economy has been experienced.
One last point, as a example, Chile presents us with a great deal of information that could be useful in drawing a parallel. Their SS system prior to privatization had accumulated equivalent unfunded liabilities, inflation was high, cost of borrowing was high, high costs on use of labor, had the same demographics problem that we face today, rate of return for workers was very low and for younger workers was expected to drop further. After privatization, inflation came down, productivity is up, unemployment is down, savings rate up. Chile has become one of the best places in the world to live-in, ranked #7 or #8 higher than Japan, and I cannot recall who the ranking institution is, maybe it was the UN. Workers enjoy the freedom and security for their retirement away from government dependence that they deserve, and SS is no longer a political tool used to gain votes. So if Chile can do it for the better future of their workers, I think that with our larger and more sophisticated private financial markets, we can do better for our workers, old and young, and our children.
