The Congressional Research Service has now released to the public its July 25, 2007 report on the costs of transitioning from a primarily "pay as you go" system of financing Social Security benefits to a "pre-funded" privatized, individual account system. It's available at this link: Laura Haltzel, Social Security: Transition Costs.
In any discussion of the merits or demerits of privatizing Social Security, these transition costs must be taken into account. In essence, it would be necessary to fund concurrently both the current retirees' benefits and the set-aside for future retirees. This CRS analysis suggests that the results over a 75-year period could be a worsening of the Social Security fiscal situation by as much as $4.6 trillion, or at best an improvement in the funding by about $0.8 trillion. Under either a "carve-out" or an "add-on" system of permitting pre-funded accounts, additional revenues would have to be raised through additional taxes or borrowing, or reduced government spending elsewhere in the budget.
These calculations also involve some assumption about reductions in benefits to those who opt for an individual account under some system of privatization. Benefit offsets occur because holders of individual accounts would not receive the full benefit of funds accruing to those accounts. These benefit offsets are not, the study shows, sufficient to offset the additional transitional costs during the 75 year period contemplated for the study; they might lessen the unfunded burden after 75 years.