Everyone knows Social Security is broke and broken. According to the latest OASDI Trustees Report, Social Security has been paying out more than its total revenue (payroll taxes and trust fund) since 2021, and the latest projections have the Social Security trust fund depleted by 2033. After that date, it will only pay 79% of scheduled benefits if significant changes aren’t made.
Reform, however, is well-nigh politically impossible. Old people are the most reliable voting bloc. No sane politician dares tamper with their precious entitlements, lest he invite the wrath of the AARP—just ask Paul Ryan or George W. Bush. Raising payroll taxes also won’t fly. Unlike the personal income tax, which is strictly progressive, lower earners pay proportionately higher shares of their income to Social Security—as of 2025, the only the first $176,000 of payroll income is taxed. While many proposals to fix Social Security include simply eliminating this “wage base” and taxing all payroll income, it’s likely that stabilizing the program would require payroll tax hikes on everyone—a political non-starter.
To fix Social Security, we need to think outside the box. Tweaking the retirement age, tax rates, and/or benefits won’t do. We don’t need “reform” so much as an escape hatch. If we can wean a relatively small number of people off of Social Security, we can preserve the substance of the program for those who truly need or desire it. What we need is a buyout.
Companies have used buyouts for decades to resolve unfunded pension liabilities. In a buyout, the company lets workers out of the retirement plan in exchange for some kind of payment. The pension plan member who opts out typically receives a lump-sum, which he/she gets to invest and manage; sometimes a more reliable annuity contract from a reputable financial company is offered. Buyouts are voluntary and therefore by nature win-win propositions: the company fixes its finances by offloading its pension obligations; workers who accept buyouts gain greater security, control, and freedom with their entitled funds.
Here’s my idea for a Social Security buyout: I renounce the benefits that I’m entitled to when I reach retirement age. In return, the government will give me a modest, gradual reduction of my portion of the payroll tax. I crunched the numbers for a 10-year phased-in reduction of the employee’s share of the Old Age tax, from 5.3% to zero. Both Social Security and I come out ahead, easily. This is because Social Security does not invest tax “contributions.” Instead, it pays them directly over to retirees, in true Ponzi scheme fashion. Its rate of return ranges from pathetically small to negative for all but the oldest and lowest-earning participants—well below the returns available with stock market index funds. The buyout is calibrated to offer a significantly higher rate of return and gain in net wealth. To address concerns of paternalistic ninnies who fear that buyout accepters will spend and not invest, the legislation can require buyout takers to invest, within an IRA or similar tax-qualified plan, the amount of the payroll tax reduction. Because I still have decades to invest before retirement, I will come out ahead compared to what Social Security would have provided. There are many like me, probably millions, who similarly aren’t counting on Social Security and are self-funding retirement. They too will voluntarily leave, as long as the value of the buyout exceeds the net present value of their scheduled Social Security benefits.
According to my initial calculations, a Social Security buyout should be a clear win for workers ages 45 and under in the top half of the income distribution. For the government, the benefits of this kind of buyout are back-loaded—they don’t really start saving money or approach fiscal balance until 15 or 20 years down the road, when benefit checks zero out for the first cohort to opt out. Cash flow would also be somewhat negative for that first 15-20 years, as the payroll tax is phased out for the buyout accepters. Social Security’s “trust fund” assets and continuing payroll taxes can cover the initially negative cash flows; once the buyout-takers reach retirement age, Social Security can again become a surplus-generating program. In the meantime, taxpayers and the general public stand to benefit immensely, with increased personal wealth and increasing real investment into the US economy.
It’s very difficult to predict the cash flows that this kind of voluntary buyout, operating under a truly massive government spending program, might entail. It is straightforward, however, to calculate investment performance for both potential buyout-taking taxpayers and the Social Security system. The policy paper includes spreadsheet models with internal rate of return and present value calculations for both individuals and the Social Security system. These simple models demonstrate the significant gains available for millions of participants. If enough people take carefully crafted buyouts, Social Security could eventually be made solvent, and here’s the best part, politically speaking: this requires ZERO changes to benefits, retirement age, or tax schedules for those who choose to stick with the program.
I’ve never liked Social Security, and I’ve long been on the record with harsh critiques. Libertarians and conservatives will probably latch on to the moralistic and/or financial critiques of Social Security, but the program remains both popular and a hot-button issue with the wider public, with HUGE vested interests and fiercely defensive political reflexes. Any proposal to fix Social Security, or even just slightly improve its fiscal stance, is going to have to involve political deal making that acknowledges sunk costs, avoids massive changes, and presents clear mutual benefits. With the ascent of Trump, the coming of DOGE, and an inkling of fiscal responsibility in the air in Washington, maybe the time is ripe for this kind of outside of the box proposal.
Find the entire policy paper here: https://www.pageturnpro.com/Indiana-Policy-Review-Foundation/112062-Winter-2025/sdefault.html
Comments, suggestions, and questions welcome: tylerwatts@ferris.edu
READER COMMENTS
David Henderson
Mar 19 2025 at 12:52pm
The link to your policy paper doesn’t work.
Tyler Watts
Mar 20 2025 at 10:55am
Thanks for bringing that to my attention. I sent in an up-to-date link and it’s been corrected.
R R Schoettker
Mar 19 2025 at 2:40pm
Ponzi scams and socialistic income transfers are unjust and evil. You can’t tweak, alter or fix evil, you can only END it.
john hare
Mar 19 2025 at 7:30pm
May I suggest that you reread the article?
Student
Mar 19 2025 at 7:39pm
+1
R R Schoettker
Mar 19 2025 at 9:54pm
I did. This was the last paragraph in it.
“Any proposal to fix Social Security, or even just slightly improve its fiscal stance, is going to have to involve political deal making that acknowledges sunk costs, avoids massive changes, and presents clear mutual benefits. With the ascent of Trump, the coming of DOGE, and an inkling of fiscal responsibility in the air in Washington, maybe the time is ripe for this kind of outside of the box proposal.
Any proposal that expects ‘fiscal responsibility’ from the State or ‘political deal making’ to accomplish anything is fruitlessly relying on ‘inside the box’ solutions which are indistinguishable from no real change. The only just solution to this obscene farce is to END it.
Alan Goldhammer
Mar 19 2025 at 5:43pm
“This is because Social Security does not invest tax “contributions.” Instead, it pays them directly over to retirees, in true Ponzi scheme fashion.”
This is not true. The trust fund purchases treasure debt of various durations and gets interest payments. A true Ponzi scheme has not investments and funds are paid directly out ‘old’ investors from the ‘new’ ones. Social Security earnings are taxed up to 85% of the earnings depending on one’s income. I can guarantee you that this is true as both my wife and I are in the max category for this tax and we have been paying it every year that we have been on Social Security. Thus, earnings are means tested just like Medicare premiums are!!! Those tax revenues go back into the trust fund.
While it is appealing to think that IRAs and 401(k) plans can do better that is not always the case. I know folks that were scheduled to retire in 2010 and their portfolios go hammered. Social Security payouts can help ease things when there is a market downturn.
robc
Mar 20 2025 at 9:20am
People can invest in treasuries from their IRA/401k just as easily as SS does. So you can handle market downturns yourself.
Also, you are partially wrong at the beginning. The SS fund purchases treasuries with excess receipts after they paid out to retirees. So its still a partial ponzi scheme.
Thomas L Hutcheson
Mar 20 2025 at 10:53pm
You are still thinking of SS as a retirement plan (gone horribly wrong :)). But it’s just not that. It’s a transfer from people Congress thought didn’t need the money so much to those who it considered needed it more. YMMD
Observerwwtdd
Mar 20 2025 at 5:31pm
Why not “phase out” the retirement benefits available to younger workers by diverting a portion of their taxes into index funds, annuities and small life insurance policies (these will “imitate” the current benefits available to those dying before retirement). As part of the trade-off….allow people electing the trade-off to pay taxes into SS AND give them much higher Roth IRA/401(k) contribution levels.
Their taxes fund current retirees AND their larger Roth IRA and 401(k) contributions give them financial safety.
Frank
Mar 20 2025 at 7:16pm
I have a more practical solution. Since you have decades to fund your retirement, how about this. Instead of a buyout, how about if the government refunds to you what you have contributed up until now ( only YOUR CONTRIBUTIONS, NOT the employers match) and you are prohibited from collecting Social Security. Dow Jones has dropped over 10% in the last 2 months. If you do not invest wisely and are destitute upon retirement, you are just SOL I will be the first to admit that the program has vastly expanded since it’s inception. It was designed solely to keep seniors who could no longer work from being destitute.
Marcus J Lanskey
Mar 20 2025 at 9:27pm
Social Security is not broke or broken. An easier solution to yours is to remove the $176,100 income cap on FICA collections. This in combination with the flat or declining US population will insure the viability of Social Security into the foreseeable future.
TMC
Mar 20 2025 at 9:30pm
First of all, SS is progressive when you adjust for the payout has a cap on it. Higher wage earners get a lower IRR on their contributions. You’ll also need to price in the disability insurance part of SS. Add to this the redistributive factor will be made up for somewhere else – you won’t escape those taxes so easily.
Thomas L Hutcheson
Mar 20 2025 at 10:45pm
Another attempt to fix SS as a retirement plan when it is not a retirement plan. It’s a tax on not-old people to give to old-people. (BTW, it’s not a Ponzi scheme, either.)
The main problem is that the amounts being given out is more than the tax collected and the resulting deficit slows economic growth. There is a subsidiary problem too. The tax on the not-old people is on their income instead of their consumption. Both problems coud be solved by ditching the wage tax for SS (and Medicare, too) and replacing it with a VAT large enough to make the systems deficit neutral. Personally I say keep benefits more or less the same, but let’s leave politicians with something to do.
Brian Dupuis
Mar 21 2025 at 1:11pm
Social Security ran at a surplus from 1983-2020 accumulating 2.9 trillion dollars in reserves which were invested in interest bearing Treasury securities. It began drawing on the reserves in 1921. Sometime between 2033 to 2035 the surplus reserves will have been distributed and the annual incoming money would only cover 79-83% of current benefits.
Is there a shortfall coming? Yes. Is it a Ponzi scheme? No.
Gene Ahearn
Mar 22 2025 at 8:40am
Good idea. Maybe combine it with my idea to give tax credits for not taking Social Security retirement. Yes, give me a credit or rebate to NOT take Social Security. many people would opt for that.
T Boyle
Mar 25 2025 at 5:17pm
First of all no, it’s not quite a Ponzi scheme. The money coming in is invested in Treasuries; the money going out is paid for by maturing and/or selling Treasuries. In the past, the Treasuries balance grew, but now it is shrinking. The fund will go broke because it will run out of Treasuries to sell and after that it will not have enough money coming in to pay for the money supposed to go out.
At that point, if payments are to continue, the difference will have to be paid for by general funds. That seems unlikely to happen.
Your proposal is effectively a form of “privatizing social security”. This generates absolutely livid opposition from the left, which tends to want to centralize all economic power in the executive office (which, both historically and at present, is ironic). However, in this context it’s worth noting that Sweden – often mistakenly seen as a bastion of the left – has privatized its retirement program very much as you recommend: contributions are obligatory; selection of assets is relatively free.
An alternative approach might be to have Social Security itself invest the funds in a broad set of assets. This would generate higher returns and, had it been adopted in the past, could have kept us out of the present situation (it’s too late now). There are, however, two really big problems with this. One is that when returns are good, politicians will vote to increase payouts by more than an actuary would; but when returns are bad, they will not. As a result, the fund will go broke. The other – possibly bigger – problem is that the investment selections will become politicized, leading to the government picking winners across the stock market, an outcome that could lead not only Social Security but the entire economy to fail.
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