The Social Security "Transition Cost" Myth

If you are wondering why the Administration has decided to label the short-term measures of Social Security reform as "transition costs," that makes two of us. As Jeff Johnson points out in his article,

The trillion dollar totals that Democrats cite as "transition costs" are actually the amount the government is borrowing to pay current Social Security benefits combined with the massive debt already owed to the so-called Social Security "Trust Fund."

Unfortunately, the most important point regarding Social Security costs is often misunderstood. As Arizona State University professor and 2004 Economics Nobel Prize winner Edward Prescott says, "Re-labeling debt is not a cost." Lawrence Hunter, senior research fellow with the Institute for Policy Innovation, agrees with Prescott and sums up the situation rather well:

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.

I know the Administration doesn't always use perfect phrases, but this is one situation where it's critical that people understand the true nature of the problem. President Bush could do better to help his own cause by not using misleading terms such as "transition costs."