Transition Costs - Public Favors Spending Cuts Over Tax Increases

October 22, 1999

A prominent issue in the Social Security privatization debate is over "transition costs." Opponents of privatization like the Century Foundation say that "unless our parents move in with us, we will have to pay twice--for their retirement as well as our own." As Nobel Prize winning economist Milton Friedman details in Cato Briefing Paper No. 46, Speaking the Truth about Social Security Reform, over the long term, transition costs are a myth.

Yet, in the short term there would be up-front costs involved with moving to a privatized system. While these early costs would be more than repaid over time, how do we cover them? We could raise taxes, issue debt or cut spending. The Cato Institute recently commissioned a Zogby International poll asking Americans what they would prefer. The answer was practically unanimous: cut spending.

By a margin of 10-to-1, Americans prefer to cover transition costs by cutting spending rather than raising taxes. By 27-to-1, they favor spending cuts over borrowing. These findings were similar for men and women; blacks, whites and Hispanics; and Democrats, Republicans and Independents.

Over the long-term, there are no transition costs in moving from a low-returning pension system like Social Security to a high-returning system with personal accounts invested in stocks and bonds. The sooner we move to a system of personal accounts and the more completely we do so, the lower our long-term costs.

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