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

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.