Tuesday, March 15, 2005

"Transition cost"

Here is yet another excellent post detailing why there is no transition cost in moving social security from a pay-as-you-go scheme to an individual account scheme. The financing cost of funding the shortfall that already exists will be an interesting test of market efficient--does the bond market think the US will renege on its pension obligations, or will it be taken by surprise when (if) the US doesn't.

If interest rates rise dramatically on the back of large government borrowing to finance the SS shortfall today (instead of financing it later), then I guess the bet was that the US would renege on its pension obligations. If interest rates don't rise much, then the cost of financing the shortfall was already factored in.


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