Privatizing the Social Security Program in the U.S.: How to Overcome the Transition Costs

Abstract

This study posits that privatization is an ideal solution to the projected budget imbalance of Social Security and focuses mainly on finding ways to make a smooth transition. Five methods of financing the transition are investigated using a policy model—payroll increase, government subsidy, benefit cuts, Trust Fund conversion into Pension Fund, faster exhaustion of the Trust Fund—all having the same end result of a 3.12% payroll tax under the privatized, fully funded scheme, replacing the 13%–17% payroll tax under the current system. Yet, the magnitude of the burden of transition costs differs depending on which of the five is used. Using the equity concern inspired by John Rawls’ principle of justice, this paper combines the five aforementioned methods to minimize the burden on the transitional generation. From simulation results under the assumptions of specific parametric values projected by the Social Security Administration, this paper concludes that people who lose from the transition can be limited to those of age 44 to 65, with minimal welfare loss.

Key Words:

• Social Security
• pension
• privatization
• transition costs

Additional information

Notes on contributors

Youngse Mun

Youngse Mun is an associate professor and the director of the Department of Military Administration at Korea National Defense University. He is especially interested in public finance, budgeting, policy analysis, and policy evaluation. His research has been published in many public administration and public policy journals. Korea National Defense University, 205, Susaek-dong, Eunpyung-gu, Seoul, (122–085), Korea. [phone], [phone]. Email: [email protected]

Inho Mun

Inho Mun is an Ethics, Politics and Economics student at Yale University, and studied and researched at the University of Cambridge during the summer of 2011. He interned in the office of a congressman at the National Assembly of the Republic of Korea in 2011, and has been working at the Department of Finance and Administration in the New Mexico state government in the United States, specializing in the budget appropriation and pension plan reform for the state economy. His research interests include public finance and economic policy. Yale University, P.O. Box 202084, New Haven, CT 06520, U.S.A. [phone]. Email: [email protected]