WOULD you pay $2,000 today, to save $10,000 in 15 years’ time? That question lies at the heart of the debate about financing Social Security reform.
President Bush’s plan to create personal investment accounts for every worker has run into a snag over “transition costs.” A transition cost is the price you have to pay to get from point A to point B. Establishing personal accounts will require about $2 trillion in government borrowing over the next 15 years, but once the accounts are in place, the government saves about $10 trillion in future obligations. Any private business with large pension obligations would approve such a refinancing plan in a heartbeat. The debt restructuring would substantially improve the firm’s balance sheet, and the stock price would rise to reflect the improved long-term finances-despite the reduction in the firm’s current cash flow.
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