Number: RS22010
Title: Social Security: "Transition Costs"
Authors: Laura Haltzel, Domestic Social Policy Division 
Abstract: Some policy analysts have suggested that pre-funding Social Security benefits through individual accounts (IAs) could improve the solvency of the current system, thus reducing or eliminating the need for higher taxes, lower benefits, or increased borrowing. However, there is general agreement among economists that any transition to a pre-funded system results in additional costs, so-called "transition costs," in the short-run. Most Social Security tax revenues are immediately used to fund payments to current Social Security beneficiaries. Therefore, a system of individual accounts that is funded by diverting part of the current Social Security tax into individual accounts will worsen the fiscal imbalance of Social Security and the overall budget, at least temporarily. Over a 75-year period, individual accounts could improve the unfunded liability of the Social Security system by $0.8 trillion or worsen it by up to $4.6 trillion, depending on how the account is structured. However, beyond the 75-year actuarial period, the benefit offset feature of most individual accounts would ultimately cover these transition costs and improve the long-term solvency of the Social Security system, leading some to refer to "transition costs" as "transition investments."
Pages: 6
Date: July 25, 2007