Transition costs to hurt US economy

So far Social Security privatization has been presented to American people as the ultimate solution that will fix everything and all the retirement income problems of Americans will simply disappear because they will become part of an "ownership society" and will control their own destiny. (Related article: How to get started with retirement planning?)

Unfortunately, the private investments accounts (in and by themselves a good idea, but not in the format suggested by the president), do nothing to "reform" Social Security or to eliminate the so-called "crisis". On the other hand, if anyone who opts for private retirement accounts but fails to get a high enough return on the investment is going to see a significant drop in retirement income. And those who see huge gains will not get to keep all the money to themselves. (Related article: Americans advised against choosing personal retirement accounts in the interest of better personal finance)

Plus, there are additional costs to American taxpayers. These are the costs associated with taking money out of Social Security and putting it into the stock market through the individual accounts. Bush administration has acknowledged that these "transition costs" will be $754 billion for the first six years but independent analysts say the full cost could be as high as $2 trillion over 10 years. That is a huge burden on the American taxpayers. Since almost all of this money will be borrowed, it will keep the deficits at a very high level. A high budget deficit means higher interest rates and lower value of dollar. Both of these will hurt the American economy.

President Bush has not included these costs (along with the cost of the war in Iraq) in his budget so that he can present a rosy picture of the economy. Then while no one seems to be talking about it but both Medicare and Medicaid are huge liabilities on the government. Last year alone, Congress added $8 trillion to Medicare's unsustainable costs by agreeing to pay for prescription drugs. (Related article: Social Security, Medicare, and Medicaid are the new challenges)

What does it mean for Americans?

There are two dimensions of the privatization issue. One is your personal financial decision and our analysis shows that you should not select private investment accounts and simply opt for a guaranteed retirement income. The other dimension is that while you can take the first decision in your best self interest, you also need to think about the US economy and the future of the country. In that sense, it will be in the best interest of all Americans if a better approach to "saving" Social Security is developed.

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