One of the main arguments you'll hear against President Bush's plan to modernize Social Security is that the "transition costs" will be too high. However, most economists -- including Edward Prescott, the winner of the 2004 Nobel Prize in Economics -- recognize that the "tranistion costs" are a myth; all that will happen is that instead of borrowing from the Social Security trust fund, as it does now, the federal government will have to borrow from another source once SS is modernized.
"We hear a lot about transition costs," Arizona State University professor Edward Prescott, 2004 winner of the Bank of Sweden Nobel Prize in Economics, said. "But I'm going to use some economic jargon, not 'political accounting' jargon.
"There are no transition costs," Prescott said at the Cato Institute Feb, 9. "Re-labeling debt is not a cost." ...
Prescott and Hunter are two of a growing number of economists who argue that the so-called "transition costs" are actually an accounting fiction, a misrepresentation of the current status of Social Security by those who do not want to see the system changed.
Basically, the FICA money that isn't immediately paid out to SS recipients is immediately "borrowed" by the federal government and spent on other things. Once SS is modernized, the government won't be able to "borrow" that FICA money, so they'll have to borrow money from somewhere else. That won't be new borrowing though, it will just changing the type of borrowing, so there really is no transition cost. It's a myth.
The so-called "transition costs" are, according to Hunter, really just the money Congress has to find elsewhere to pay for current Social Security benefits, the other programs it has been funding with FICA tax revenues and the amount already borrowed from the Social Security "Trust Fund."
Under a partially privatized Social Security system, "the balance sheet looks better because they're borrowing less money," Hunter explained. "But, in the short term, because they're not borrowing the [FICA tax] money, that means they've got a cash flow problem.
"If the government turns around and borrows money to alleviate that cash flow problem, it hasn't borrowed 'new money,'" Hunter continued, "because, by putting the [FICA tax] money in personal accounts, it's borrowed a dollar less [from current taxpayers]. Now, if it turns around and borrows a dollar [from another source] to cover the cash flow problem, all it's done is to replace that dollar in debt.
"In other words," Hunter concluded, "it's substituted one form of debt for another."
If it's hard to understand, it's because the government has been screwing us with Social Security for decades and purposefully obfuscating the program.