Politicians of both parties generally have it both ways about whether the money collected in Social Security taxes but not paid out in Social Security benefits is net revenue to the government, or whether it is being held in a sacrosanct "trust fund" for the benefit of future retirees (i.e., the very people who are currently paying the money in). The latest official Congressional Budget Office figure for the 2004 federal deficit, for example, is $422 billion. If it weren't for a $153-billion "off-budget" surplus in the trust funds for Social Security and other purposes, that deficit figure would be $574 billion. But the $153 billion will be needed someday to pay Social Security benefits, and woe betide the budget official who reminds people that we actually used it to buy down the deficit back in 2005.

There are only two ways out of this problem. One is to increase revenues and the other is to cut benefits. Privatization is sometimes presented as a third way. But even its most enthusiastic advocates admit there are "transition costs." Because most of today's Social Security tax revenues are used for today's Social Security benefits (only a quarter of 2003 revenues went into the trust fund), this money must be replaced before tax revenues can be diverted into private investment accounts. But the amount of money needed for this transition -- $2 trillion according to some estimates -- would render moot any talk of the system facing insolvency. It's as if someone tells you he's got a magic trick that will wipe out your $1,000 credit card bill -- and all he needs is $1,000 from you to start the magic working.

Then there's the magic itself: Private investment, particularly in stocks, pays a better return than the government bonds in the Social Security trust fund. Privatization proponents are often vague about what happens to this extra profit. Do more fortunate participants benefit from their wise investment choices, or will their payments from the non-privatized part of Social Security be trimmed to help cover any shortfall to the overall system? More important: It is hard to see how this extra profit will actually materialize. Let's say it's true that the typical person with a private retirement account can do better than the payoff on the government bonds in the Social Security trust fund. This raises the interesting question of why anyone would ever voluntarily buy a government bond, although many do. But put that aside. Every dollar in the trust fund is helping to finance the national debt, and every such dollar that is deflected from the trust fund into private investment accounts has to be replaced with a dollar the government borrows on the open market. As a result, despite privatization, the total amount of government borrowing and the economy's overall level of private investment remain precisely the same as before.