g to a private system. Harvard University Professor MartinFeldstein estimates that the value of future pension benefits would riseby 60 percent, from $11.3 trillion to $18 trillion. Boston UniversityProfessor Laurence Kotlikoff also found large potential gains in outputand living standards from privatization. While everyone would be better off in the long run from a privatizedSocial Security system, it would cost several trillion dollars to, ineffect, buy out the current generation of retirees. Thus while a privateSocial Security system would clearly make sense if we were starting fromscratch, the cost of switching today may be too great. While the AmericanAssociation of Retired Persons will no doubt fight to the death to stopprivatization, in the long run its position is untenable. Social Securityis going broke and will eventually be replaced with a private pensionsystem. The sooner we at least start moving in that direction the betterit will be for future generations as well as today's economy. Privatization does contain pitfalls. The present Social Security systemis pay-as-you-go. It uses the receipts from today's payroll taxes tofinance the checks for today's retirees. If those tax receipts werediverted to a new, privatized system, there would be an immense shortfall.The loss would have to be made up either by hiking taxes, increasingborrowing or drastically cutting benefits to current retirees. Thepresent Social Security system faces a long-term shortfall of between 1percent and 4 percent of total payroll, depending on your projections offuture economic growth. But the existing pay-as-you-go system could berendered solvent by a judicious combination of increasing the retirementage by two or three years and slightlyraising taxes. Also there is the question of whether to privatize the whole system, orwhether to add a second tier. We might keep the basic system butsupplement itwith self-directed IRA-like funds. The basic tier w...
