Who Would Bear the Transition Costs of Privatizing Social Security?
Any proposal to privatize the Social Security program faces a challenge: who would pay for Social Security benefits during the transition from the current system to the privatized one? In today’s program, taxes on current workers largely finance Social Security payments to current beneficiaries; thus, the system’s funding relies on intergenerational transfers. Under a privatized system, however, intergenerational transfers would be replaced by workers’ financing their own retirement by building up assets in private accounts. Thus, a transition period would occur during which some generations of workers might have to make payments not only to their private accounts but also to current beneficiaries. The added costs to those transitional generations would make them worse off and cause them to reduce their consumption of goods and services. However, that reduction in their current consumption would have long-term benefits for the economy: it would boost national saving, increase the natio
