Transition Costs
December 24th 10:57:03 AM
There are few arguments against personal accounts as pesky as the claim of transition costs, which is the idea that switching to a partially pre-funded retirement system cannot be done without incurring an expense. That a switch to personal accounts costs money is indeed true; what is untrue is that this cost is greater than the liabilities we face further down the road. In economic terms, the cost of achieving solvency with personal accounts is less than the net present value of future liabilities. Such a transition to solvency would therefore save money in the long term.
Of course, most people seem never to make it to the rebuttal which exposes transition costs as fallacious. Instead, they remember that switching to personal accounts costs money. Their attention wanes somewhere between this fact and the second, more important fact that our current system will cost us a whole lot more.
I've been frustrated by this for some time, and so I have been looking for a good explanation of transition costs. Well, I think I stumbled upon an explanation when I opened the mail a few days ago. Inside one holiday-themed card was an offer from a health club that I joined at the beginning of 2007. I wound up not going to the gym that much, and so they offered to let me buy out the remainder of my membership for 30% less than what I owed. Instead of my paying another $100, then, the gym offered to let me buy out my membership for $70 as a measure of goodwill.
Here's the question: Did buying out the membership entail a transition cost of $70? Or did it reduce my future costs by about $30?
In other words, did I face an additional cost by taking advantage of the health club's offer? Or did I end up saving money?
I think the answer is pretty clear: The transition cost argument is bogus. But there's another lesson here too, and it applies to those of you about to make New Year's resolutions: Apparently not going to the gym after you've joined can save you money.
Happy Holidays!
Posted by Ryan Lynch
Comments
That, too, has bothered me in the past, and you've stumbled upon a really good way to illustrate the difference.
Posted by Jeremy on January 05th 11:57:20 AM
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