Privatizing Social Security, Part III

The Expense of Transition Will Prevent Privatization

The previous posts already showed how privatizing Social Security would result in better returns for beneficiaries and how most opponents to privatization simply make emotional arguments in opposition to privatization. The real reason the system will not get privatized is the same reason the system will eventually collapse: it’s a Ponzi scheme. If that term is too inflammatory, call it a pay-as-you-go system.

John Goodman (not the actor) provides a list of reasons why most democratic voting countries have pay-as-you-go social security systems rather than privatized systems. The main reason is that such a system allows politicians to “appear to meet the need without really paying for it.” Next, the system generates revenues that exceed required payouts in the early years, allowing politicians to raid the “trust fund” to transfer money to their constituents (i.e., buy votes). The system cannot be dismantled because of the “ratchet effect.” That is, as the beneficiary base expands, it becomes too costly to transition them into another system.

As many people have pointed out, the Social Security system will eventually collapse because the number of beneficiaries continues to increase while the number of  contributors per beneficiary is decreasing. The promised benefits impose a huge unfunded liability to the government. Transitioning to a privatized system would be better for future beneficiaries but removes the funding of current beneficiaries. In short, privatizing Social Security would force the government to acknowledge the unfunded liabilities, and the deficit (and debt) would explode. No politician wants to take the blame for that.

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