(FORTUNE Magazine) – Many economists favor privatizing Social Security and investing contributions in the financial markets. FORTUNE looked at the advantages of the idea (September 30). Here, Peter G. Peterson, chairman of the Blackstone Group and president of the Concord Coalition, warns of the dangers.

Defenders of the Social Security status quo who insist that the system makes every generation a winner typically use a very low discount rate to analyze the benefit payback of Social Security FICA taxes. Some economists who favor an immediate privatization of Social Security go the other way and prefer to use a much higher rate--such as the 6% average long-term return on U.S. equity--to show that every generation loses under Social Security. These critics rightly understand that the official "trust funds" are a scam and that pay-as-you-go financing shortchanges the economy. But by overblowing our recent experience with a buoyant stock market, they paint an equally inaccurate picture and create equally unrealistic expectations. Let's suppose a major privatization is enacted this year. What if the Dow Jones from 2000 to 2015 does no better than it did between 1967 and 1983--in other words, that it goes nowhere? Forget economic theory. Imagine how Americans would react politically to finding their retirement holdings have not appreciated as "promised" to allow them to retire, especially after having been told they will all become retirement millionaires.

Why do Social Security privatizers gravitate toward a very high discount rate? One reason is that it makes the current system look worse. But there is another reason. While I advocate creating a mandatory, funded, portable, and personally owned retirement account that would allow individuals to invest in equities (while gradually turning Social Security into a safety-net system), I warn all concerned that this transition will be complex and costly. We would need to do some very careful planning. After all, it requires that we somehow pay up now for two retirements--today's workers as well as today's retirees.

A high discount rate makes the job of transition to a "privatized" system seem miraculously painless. It means that we can leave the benefits alone, rack up trillions of new federal debt (and the related increase in interest rates and interest costs), stuff the borrowed money in every worker's equity account, and make every American much better off. It means the government ought to practice colossal arbitrage with irrational private savers (buying stocks and selling bonds) independently from Social Security's problems. Since no new savings--the indispensable element--are involved that would raise the aggregate returns to the economy as a whole, won't this massive shuffling of funds affect relative returns on government bonds (raise them) and on equities (lower them)? Indeed, if it did make sense for the government to go into the arbitrage business, one wonders why it should stop with Social Security. Why doesn't it always make sense for the Treasury to borrow trillions, invest the funds in the stock market, then refund the profits to taxpayers? To ask the question is to answer it. It is the stuff of pipe dreams.

In Will America Grow Up Before It Grows Old? I explore these issues in depth. I explain that a central purpose of Social Security reform must be to raise our national savings rate--which is also why I favor shifting from an income tax system to a progressive consumed-income tax system. In particular, I show what all too many conservatives have in common with all too many liberals when they approach the question of senior benefits: the urge to fan the flames of victimization while holding out costless elixirs. When the Age Wave is finally upon us, and when we stare directly at the sudden economic and fiscal challenge of caring for tens of millions of newly dependent retirees, no one is going to recall today's excuses. Americans will then either thank us for taking the realistic measures and incurring the modest sacrifices necessary to prepare for this epochal demographic event, or they will blame us for endless denial and delay, all because we refused to give anything up. If Social Security reformers insist on a miracle or nothing--and if the need to raise national savings by temporarily consuming less (including a reduction in benefits) remains unacknowledged by both the left and the right--we will wind up with nothing. And our kids will be poorer for it.