What Transition Costs? - FreedomWorks

WASHINGTON — In the more than 41 years that I have been writing columns, nothing has generated more unfavorable comment from conservatives than my Dec. 6 report on Republican Sen. Lindsey Graham’s Social Security plan. He would finance the transition costs for private Social Security accounts by raising payroll taxes. Of all the outraged critics from the Right who contacted me, economist Larry Hunter had the most pungent rebuttal: “There are no transition costs.”

If that is so, I asked Hunter, can you write me a one-page explanation to buttress your remarkable claim? Nearly a month later, he gave me three single-spaced typewritten pages plus four colored graphs. Actually, they portray an increase in federal expenditures forced by private accounts — that is, transition costs. Hunter’s point: There would be no long-term net transition costs. Doing nothing will cost much more, beginning as early as 35 years from now. (Hunter’s analysis will be published by the Institute for Policy Innovation.)

That amounts to no real transition costs. The problem with this argument is that we are talking about red ink far into the future when nearly everybody now debating the issue will be dead. Although it is a difficult argument to make, it looks like the only alternative to Graham’s proposed higher payroll tax payments in the upper income brackets.

The Democratic Party establishment is appalled at the thought of private Social Security accounts turning ordinary Americans into owners of stocks and bonds and, therefore, potential Republicans. The argument by Democrats that private accounts are too risky fails the test of history. Nobody can find a 20-year period in America when investments have not gained.

Accordingly, the central argument against private accounts has become that they cost too much. If 4 percentage points of the 12.4 percent Social Security payroll tax could be invested privately, transition costs were estimated at $1 trillion. If a 6.5 percent contribution envisioned by a bill sponsored by Sen. John Sununu and Rep. Paul Ryan were permitted, the estimated cost would rise to $2 trillion.

That led Lindsey Graham to propose raising the amount of taxable income subject to the payroll tax, an offer to Democrats in exchange for private accounts. When I reported Graham’s proposals, I was bombarded with criticism that the senator was “negotiating with himself,” threatening a further graduation of the already highly graduated tax system. Hunter, chief economist of the FreedomWorks think tank, told me Graham had bought into a problem that does not exist.

Hunter’s argument is that transition costs are “significantly smaller” than costs from doing nothing about the estimated $12 trillion liability in the Social Security system. In his paper prepared for me, he argued “so-called ‘transition costs’ are demonstrably smaller than the ‘do nothing costs.'”

Hunter cites the Sununu-Ryan bill, limiting federal spending growth to 3.6 percent a year (the Clinton administration rate), as getting into the black in 2037. Under his bill, Sununu told me, the additional, temporary federal borrowing forced by private accounts could be limited to $600 billion. If no change is made in the present system, the federal borrowing to sustain Social Security would expand as far as the eye could see into the rest of the 21st century. Hunter, Sununu and Ryan make only conservative estimates, not figuring in the economic feedback from so much new private investment.

“The debate in Washington over so-called ‘transition costs’ completely misses the point,” Hunter wrote. “There already is a $12 trillion liability on the books of the U.S., which can only be shrunk by repudiation.” Since that repudiation is likely to occur when nobody around today is still alive, Democrats are following John Kerry’s campaign stricture that there is no Social Security problem and no need for change.

Writing an open letter to Treasury Secretary John Snow, published in the Dec. 20 Wall Street Journal, Steve Forbes (CEO of Forbes Inc.) wrote: “Critics will cry that we will have to float bonds to implement this kind of reform. So what? . . . It would turn Social Security from a pay-as-you-go liability into a capital-creating, economy-growing asset.” The question remains whether nearly as many Democrats would be induced to sign up for Forbes’s vision as they would for Graham’s tax increase.