When I posted on Social Security as a Ponzi scheme on March 11, I didn’t expect the degree of interest I got. It also led to a discussion of what to do now that we’re in a mess.
So I’ve decided to post the rest of my chapter of The Joy of Freedom: An Economist’s Odyssey. I’ll do it in installments. The last installment discusses what to do about it.
Here’s the next installment.
Flawed from the Start
How did we get into this mess? It started in 1935, when President Franklin D. Roosevelt, together with Congress, explicitly designed Social Security as an intergenerational “chain letter.” That, more than any other single feature, virtually guaranteed a big mess for future generations. Interestingly, when the proposal was debated, its chain-letter aspect was little discussed. Politicians in neither the Democratic nor the Republican party seemed upset about that crucial aspect of the plan. At the time, some of its proponents thought of the Social Security tax as a way of extending the income tax to lower-earning people. W. R. Williamson, an actuarial consultant to the first Social Security Board, stated that Social Security extends Federal income taxes “in a democratic fashion” to the lower-income brackets.[1]
Roosevelt and Congress also rejected the Clark amendment, named after Missouri Senator Bennett Champ Clark, which would have exempted employers and employees who had government-approved pension plans. Although the Senate backed this amendment by a vote of 51 to 35, it was later removed. Had that exemption been in the law, many fewer people would have been in the Social Security program and, in fact, with the growth of private pensions, the fraction of the workforce in Social Security would probably have shrunk over the years.
Roosevelt strongly believed in a payroll tax as the way to finance the program. Calling the taxes “contributions,” which the federal government did from the start, would make people think of Social Security as an annuity that they had paid for and that they therefore had a right to. That’s also why Roosevelt wanted to use a special payroll tax rather than general revenues. If people paid a payroll tax earmarked for Social Security, reasoned FDR, they would think themselves entitled to benefits from the program. FDR stated,
[T]hose taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions….With those taxes in there, no damn politician can ever scrap my Social Security program.[2]
Roosevelt was saying, in effect, that once the entitlement mentality had taken hold, it would be very difficult ever to cut or eliminate Social Security. He was right. What he didn’t say—but what the chain-letter financing implied—was that the other reason Social Security would be entrenched was that older people would press politicians for continued benefits, which would necessitate continued taxes on working people, who, when they retired, would push for further taxes on the next generation, and on and on forever. In short, FDR implemented a system of passed-on intergenerational abuse that is still with us today.
Presidents Johnson and Nixon made the problem worse. Between 1967 and 1972, Congress and the President raised Social Security benefits by 72 percent (37 percent after adjusting for inflation). When Wilbur Cohen, Johnson’s Secretary of Health, Education, and Welfare, proposed a 10 percent hike in Social Security benefits, Johnson replied, “Come on, Wilbur, you can do better than that!”[3] President Nixon added to the problem by getting into a bidding war with Wilbur Mills, a powerful congressman who was jockeying for the 1972 Democratic presidential nomination. The net result was a 20 percent increase in benefits.
MIT economist Paul Samuelson added some of the intellectual backing for these policies. “The beauty about social insurance is that it is actuarially [italics Samuelson’s] unsound.” Samuelson’s point was that if real incomes were growing quickly, each generation could get more out of Social Security than it paid in. While its critics attacked Social Security as a Ponzi scheme, Samuelson beat them to the punch in 1967 by blessing it as one. “A growing nation,” wrote Samuelson, “is the greatest Ponzi game ever contrived.”[4]
We are now paying through the nose for that “beautiful” Ponzi game. If we include the portion paid by the employer, over 62 percent of families now pay more in payroll taxes (most of which is for Social Security) than they pay in federal income taxes.[5]
The initial payroll tax rate when the program first began was 2 percent on the first $3,000 of income, split equally between employer and employee. In the year 2001, the tax rate for Social Security was 10.6 percent on income up to $80,400 and zero after. This increase in income taxes is not simply an adjustment for inflation. Three thousand dollars in 1938, adjusted for inflation, is less than $38,000 today, or only about half the base income that is taxed today. The maximum tax, employer and employee combined, is $8,077 today versus $60 when the program first started. Had the tax been increased just for inflation, but no more, it would be only about $750 today. See Table 14.1.
Table 14.1 Maximum Tax for Social Security (excluding Disability Insurance)
| Calendar Year | Maximum Tax | Maximum Tax in 2000$ |
| 1939 | $60 | $735 |
| 1950 | $90 | $636 |
| 1955 | $168 | $1,066 |
| 1960 | $264 | $1,518 |
| 1965 | $324 | $1,750 |
| 1970 | $569 | $2,496 |
| 1975 | $1,234 | $3,902 |
| 1980 | $2,341 | $4,835 |
| 1985 | $4,118 | $6,512 |
| 1990 | $5,746 | $7,483 |
| 1995 | $6,438 | $7,187 |
| 1997 | $6,932 | $7,348 |
| 2001 | $8522 | $8,274 (estimated) |
Source: Tax rates and tax base from Social Security Board of Trustees Report, various issues; inflation adjustment from Economic Report of the President, various issues.
Ponzi versus Stocks
Many critics of Social Security have claimed that the current elderly are getting a windfall from the system, but that the younger you are, the worse a deal you will get. They’re half right. The younger you are, the worse your deal. But many of the current elderly are also hurt. The reason is that the return from Social Security compares very unfavorably to the returns available in the stock market.
In a 1987 article in the National Tax Journal, Stanford economists Michael Boskin (later to be chairman of the first President Bush’s Council of Economic Advisers), Douglas Puffert, and John Shoven, and Boston University economist Laurence Kotlikoff presented data on the rate of return earned from Social Security taxes[6]. The real rates of return varied from minus 0.79 percent to 6.34 percent and depended crucially on the person’s age (older is better), income level (low income is better than high income), and marital status (being married with one spouse not working is better than either being single or being married with both spouses working). Interestingly, even the person who did the best—someone born in 1915, the sole wage earner for a married couple, earning only $10,000 a year in 1985 dollars—received a return of 6.34 percent. Every other category of income earner they considered, including those slightly younger or with a slightly higher income, earned a lower return from Social Security taxes.
In a more recent study,[7] Harvard economist Martin Feldstein and Dartmouth economist Andrew Samwick found that the average rate of return on taxes paid will be as shown in Table 14.2.
TABLE: Average Real Rate of Return on Social Security Taxes Paid
| Year of Birth | Pre-1915 | 1915 | 1930 | 1945 | 1960 | 1975 | 1990 |
| Real Rate of Return | 7.0% | 4.21% | 2.52% | 1.67% | 1.39% | 1.39% | 1.43 |
Source: Feldstein and Samwick, “The Transition Path in Privatizing Social Security,” National Bureau of Economic Research, Working Paper # 5761, September 1996.
Compare these rates of return with what you could have earned with an indexed portfolio of stocks. According to Ibbotson Associates, a Chicago-based firm that computes stock market returns, the average rate of return on stocks between 1926 (before the 1929 crash) and 1997 was 11.0 percent, or 7.7 percent when adjusted for inflation.
For shorter periods, of course, the rate of return has been higher and lower than this, but for no 30-year period has the real rate of return ever been below 4 percent. So a rate-of-return comparison shows private investment in stocks to be superior to the government system for people who invest for 30 years or more. Of course, you can find 5-year periods and even 10-year periods during which you would have done considerably worse. According to Ibbotson Associates, the worst 10-year period was October 1, 1964 to September 30, 1974, when the annual inflation-adjusted rate of return in stocks was -4.3 percent.[8] The moral of the story is that you shouldn’t put all your savings in stocks if you plan to draw on the funds in 10 years or so.
Another equally valid way to compare makes the contrast starker: look at the effect that Social Security taxes and benefits have on your wealth. Economists do the computation in three steps. First, they compute the present value of Social Security taxes paid by you and your employer—the value at retirement age of all the previous taxes paid, assuming that they earn compound interest. Second, they estimate the present value of Social Security benefits—the value at retirement age of a stream of future income—using the same rate of return they use for the taxes. Finally, they subtract the present value of taxes from the present value of benefits.
The crucial variable for such a calculation is the interest rate. A pessimistic real rate to use is 4 percent. Why? Because, as noted above, you could have earned over 4 percent with a portfolio of stocks for the worst 30-year period for stocks. Shawn Duffy, a student at the Naval Postgraduate School, using an inflation-adjusted rate of return of 4 percent, found that someone born in 1929 who paid the maximum Social Security tax his or her whole working life and who retired in 1994, would have been $120,000 better off with a private savings plan instead of Social Security. Someone who worked at the average wage his or her whole life would have been $54,000 better off without Social Security. And even a 1994 retiree who earned the minimum wage for the whole of his or her working life, supposedly the quintessential social-security-windfall king, would have been about $9,000 better off with a private savings plan.[9] With a more realistic 6 percent real rate of return, the Social Security caused the maximum-earning 1994 retiree to lose $262,000 in wealth, caused the average earner to lose $160,000, and caused the minimum-wage earner to lose $66,000.
It’s true that the earliest recipients of Social Security did very well. That’s because they had paid into the system for only a few years, but received substantial benefits for many years. Miss Ida Mae Fuller, for example, the first recipient of Social Security, received, by the time of her death at age 100, $20,000 in benefits in return for $22 in taxes paid. But now that all future and most current beneficiaries have paid taxes over a working lifetime (when this happens, economists who study Social Security call the system “mature”), there is no windfall for current and future retirees.
[1] “26,000 in Brooklyn Defy Security Law,” New York Times, November 29, 1936, p. 37.
[2] From Arthur M. Schlesinger, Jr., The Age of Roosevelt, vol. 2, The Coming of the New Deal (Houghton Mifflin, 1959), pp. 309–310, referenced in Martha Derthick, Policymaking for Social Security, Washington, D.C.: Brookings Institution, 1979, p. 230.
[3] This story is told in Peter G. Peterson, Will America Grow Up Before It Grows Old?, New York: Random House, 1996, pp. 93–99.
[4] Samuelson quotes are from Newsweek, February 13, 1967, and are quoted in Derthick, p. 254.
[5] Andrew Mitrusi and James Poterba, “The Distribution of Payroll and Income Tax Burdens, 1979-1999, National Bureau of Economic Research, Working Paper No. 7707, May 2000, p. 24.
[6] Boskin, Michael, Laurence Kotlikoff, Douglas Puffert, and John Shoven, “Social Security: A Financial Appraisal Across and Within Generations,” National Tax Journal 40, 1987, pp. 19–34.
[7] Martin Feldstein and Andrew Samwick, “The Transition Path in Privatizing Social Security,” National Bureau of Economic Research, Working Paper # 5761, September 1996, p. 20.
[8] I thank Heather Fabian, public affairs manager at Ibbotson Associates, for providing the computations.
[9] Shawn P. Duffy, Social Security: A Present Value Analysis of Old Age Survivors Insurance (OASI) Taxes and Benefits, Naval Postgraduate School, Masters Thesis, December 1995.
READER COMMENTS
Rob Rawlings
Mar 14 2025 at 9:00pm
Great article! Can’t help but think though that the original Ponzi must be turning over in his grave at the idea that a scheme where you are almost guaranteed to get worse returns than if you invested in the stock market is being associated with his name.
David Henderson
Mar 15 2025 at 12:07am
Thanks, Rob.
Good point.
nobody.really
Mar 15 2025 at 1:45am
Abuse? Remind us, what compensation did the young pay the old for the full panoply of civilizational benefits bestowed upon them? I am under the impression that my forebearers bore enormous costs—some going so far as to give their lives—so that I might enjoy the benefits I do. As far as I know, anyone who does not care to pay FICA taxes is free to leave the country. But I see little cause to argue for an entitlement to receive benefits without also bearing burdens.
Why a portfolio of stocks? If you’re picking comparisons at random, why not to an investment in bitcoin? If you’re NOT making comparisons at random, can you explain why federal bonds would not be the more appropriate point of comparison?
While you’re at it, could you tell us how these various studies that model the elimination of social security model the economic effects of the resulting changes to the US tax code? After all, FICA taxes don’t merely finance US social security; they finance federal operations in general. So if there were no FICA taxes, presumably the US would have implemented some other mechanism to raise federal revenues; any comparison built on the opposite assumption would be ludicrously biased, right?
Thomas L Hutcheson
Mar 15 2025 at 10:53am
Henderson’s mistake, I think, it treating SS as a (flawed) retirement plan instead of as social insurance like Medicare and unemployment benefits (and a child allowance if we had one besides the piddling tax credit).
Richard W Fulmer
Mar 15 2025 at 11:43am
I think that the quotes from FDR in this article put paid to the argument that people misinterpret Social Security as a pension plan – it was purposely sold as a pension plan.
Thomas L Hutcheson
Mar 15 2025 at 9:56pm
I said that the misconception was deliberately fostered and it has contributed to the disfunction.
Richard W Fulmer
Mar 15 2025 at 11:59am
Yes, abuse. Most elderly Americans contributed to the economy and were compensated for their work. Their contribution does not entitle them to an unlimited, perpetual claim on younger generations. You paid your doctor to cure you, and that payment settled the debt. He has no claim to a portion of your salary for the rest of your life.
Social Security and Medicare are immoral. They transfer wealth from relatively poor workers to the nation’s wealthiest demographic – the elderly. Assisting the elderly poor doesn’t require subsidizing the elderly rich.
Thomas L Hutcheson
Mar 16 2025 at 9:15am
That’s why SS is mostly taxable income. It you think it is too generous for rich people you just think that the marginal tax rate for high income people is not high enough and I agree.
As for Medicare it’s social insurance. People pay taxes [wage taxes not a VAT, unfortunately] when well a receive benefits when sick. We don’t ask how well off the person whose house burns. Insurance transfers income from those not suffering losses to those suffering losses. Why should SS and Medicare be different?
Richard W Fulmer
Mar 16 2025 at 1:44pm
Private insurance – including fire insurance – is voluntary, and premiums are based on policyholder choices, actuarial calculations, and individual risk. In contrast, Social Security and Medicare are compulsory programs funded by involuntary taxes. Benefits are not necessarily proportional to contributions, and younger workers receive no immediate protection in exchange for their payments.
More importantly, calling Social Security and Medicare “insurance” does not address the morality of forcing poorer workers to subsidize wealthier retirees. Why should a young grocery store worker struggling to pay rent be taxed to support a retiree with a million-dollar home and a healthy investment portfolio?
john hare
Mar 15 2025 at 4:27am
One argument I make is that people that purchased their first house on a 30 year mortgage could have paid it off in 6-9 years if the SS money had gone to principle. So responsible 30 year olds with paid for houses and 30 odd working years to invest forward.
The normal counter argument is “What about those that don’t save???”
Thomas L Hutcheson
Mar 15 2025 at 10:47am
I agree that SS was badly designed. Transferring income to people in old age when they are less likely to be working is an OK idea by me. The error (besides the initial exclusions of who received benefits) was to finance these payments with a capped tax on wages.
This is bad first of all becasue some of wages are saved and it’s better to tax only consumption.
Second it leads to the misconception of SS as retirement plan in which one “contributes” and later “gets back” their contribution plus its yield, a misconception that was deliberately fostered.
Third, although with perfect transparency this would not be the case, in practice I suspect that workers do not value the employer’s “contribution” as part of their remunerations, and so in effect the system discourages employment just like a minimum wage does.
Fourth, politically it has proven difficult to adjust the level of the wage tax to the approximate level of benefits leading to surpluses earlier on and deficits now.
So what to do? A wage tax was cutting edge policy in 1935, but today (and even at the time of Johnson and Reagan) we have VAT which IS a tax on consumption, does not discourage employment and is probably easier to adjust to changing demographics of beneficiaries to keep the system revenue neutral. And by the same logic the VAT should also be used to finance Medicare, ACA, and unemployment benefits.
What the level and structure of SS/Medicare/unemployment benefits should be separate questions although the answers will affect the VAT rate needed to finance them. Personally I think the “retirement” age coud be further raised and linked to expected years of life at, say, 70. Medicare costs could also be reduced by better enforcement of excess payments under Medicare Advantage or eliminating that feature entirely. Unemployment benefits, OTOH, should be more generous replacing a % of the lost income.
But whatever level of benefits is chosen let’s pay for them with a consumption tax and not let the system suck resources away from private investment via the deficit.
Richard W Fulmer
Mar 15 2025 at 12:11pm
Social Security gives politicians a powerful tool for buying votes. They can raise benefits knowing the bill won’t come due until long after they leave office. However it’s funded – whether through a payroll tax or a VAT – the program will expand until it outgrows its revenue.
steve
Mar 15 2025 at 11:11am
Your analysis is similar to what I have seen others determine. What isn’t clear is what you would do instead. If you wanted to convert to a stock index fund now, how would you continue to pay people already on SS? Would you make the contributions mandatory like with SS? If not, what would you propose happen to the large percentage of people who make no contributions or the even larger group that wait until later in life to start making contributions?
As sort of an aside, it seems like people might be willing to pay a premium for a guaranteed return. Wouldn’t that be closer to bonds than equities? AFAICT bonds have a much lower rate of return if you are choosing the low risk/risk free ones with something like a 2.3% rate by some sources.
Steve
Jose Pablo
Mar 15 2025 at 4:21pm
Bonds have no guaranteed return. Not even the low-risk ones. And there is no such thing as a risk-free bond.
Government-issued inflation-adjusted perpetuities, the (imaginary) security that gets as close to a risk-free bond as you can get is exactly that, imaginary.
Thomas L Hutcheson
Mar 16 2025 at 9:19am
There is nothing “imaginary” about a law that says that under certain circumstances one is paid certain moneys.
I think this discussions still lies within the framework of SS as a flawed pension plan instead of a flawed social insurance program.
Jose Pablo
Mar 16 2025 at 10:18am
There is nothing “imaginary” about a law that says that under certain circumstances one is paid certain moneys.
No, but that is not a “security” you can invest in either, which is what Steve was talking about.
robc
Mar 15 2025 at 11:22am
I was going to reply to one of the responses with a quote from one of [Larry] Niven’s Laws but it turned out not to be one.
However there are two more generally appropriate in response to a number of comments:
19. Not responsible for advice not taken.
20. Old age is not for sissies.
Alan Goldhammer
Mar 15 2025 at 11:22am
One way to address the problem is to eliminate the inflation adjustment for SS. I retired with a pension that was not adjusted for inflation. I knew what I was getting each month and that was it. Perhaps the same thing should be done in this case. I briefly looked at the comments in the previous thread and did not see anyone mention that SS earnings are taxed if one’s total income is over a certain threshold. Up to 85% of the earnings can be taxed. My wife and I are subject to the tax on all our SS benefits as we planned for retirement. The money from that tax goes back into the trust fund. Thus, SS is in effect means tested that same way that Medicare Part B and D are. We both pay more for Part B than a lot of other seniors because of our AGI and that is adjusted every year best on the tax filing.
Thomas L Hutcheson
Mar 15 2025 at 10:08pm
If I did not mention it, it was an oversight. I really do not see the argument in principle for not taxing SS fully so long as we are taxing income and not consumption. The “in principle” hides the problem of transitioning, of course.
Another conundrum that one does not face if we taxed consumption and not incomes.
Ike Coffman
Mar 15 2025 at 11:55am
I hate to do this, but I have to dispute every single thing you wrote. In order to do so, I will need to give you real numbers, which is scary. And frightening, by the way.
I retired in 2019, just before the pandemic. Because I also have a pension, I did not need to collect my social security until 2022, and I have been receiving SS since then. My current payment is $1220 per month, after my Medicare deduction, so I receive a total of $16,472 per year. Starting from my first paycheck as a dishwasher in high school in 1971 until I retired, the total of my own plus my employers contribution is $64,317.
In order to receive the amount I get per year I would have to have about $330,000 in a retirement account. There is absolutely, positively no way that I would have had nearly that much. That makes your analysis totally flawed, and I can prove it. My wife has been contributing to a 403(b) since 1989, and the total sum of her retirement account is $811,615.32. The total amount of her contributions are $474,449.49. You do the math, but the bottom line is that is a terrible (but real) rate of actual return. Part of the reason for that low rate of return is the limited options available under her retirement plan. If that rate of return were applied to my SS contributions I would be getting about $450 per month, and I would have been unable to retire.
What I would like you to do, Dr. Henderson, is to resolve my reality with your theoretical analysis. Please.
Monte
Mar 15 2025 at 6:05pm
Pardon the intrusion, but by my calculations, your wife has earned an ROI of ~2.75%. Starting in ‘89, a well diversified retirement portfolio should have returned between 5-8%. Taking the lower of the two, that portfolio would have earned well over $1.3 million. If I had to guess, I’d say your wife’s contributions were being invested in low-risk assets, which, over the period in question, has been too conservative.
john hare
Mar 16 2025 at 5:11am
Ike Coffman
Mar 16 2025 at 8:37am
You forgot the pension part. Industry first 21 years, public school teacher after that.
And it is exactly my point that theoretical returns do not equal real returns. I was not invested that conservatively, it is possible I was too aggressive in the early years. I don’t remember too much about investments in the 90’s, but 2008 wiped us out. Yes, I got more conservative after that.
Down years seemed to have a larger effect than up years.
My experience is that investing in the market is not a panacea. In fact, the insurance company we used as our investment vehicle (the only options we have due to state policy) took every opportunity to make themselves money at my expense. They nickel-dimed us, and scr*wed us over every chance they got. Our state regulated policy would be national policy if government invested retirement funds in the market.
My other point is that social security returns are a much better deal than the article describes, and I did not retire that long ago. Certainly a reason SS is in trouble now.
Monte
Mar 16 2025 at 12:05pm
It’s incorrect to assume that any state’s regulated retirement plan for workers would automatically become national policy. In fact, it sounds like your state’s policy forced your plan into relying on an insurance company that mismanaged retirement funds.
Bill
Mar 15 2025 at 5:58pm
Your “ Roosevelt and Congress also rejected the Clark amendment, named after Missouri Senator Bennett Champ Clark, which would have exempted employers and employees who had government-approved pension plans. Although the Senate backed this amendment by a vote of 51 to 35, it was later removed” brought to mind some changes in Social Security under the recently passed Social Security “Fairness” Act. (I placed “Fairness” in quotes because, based on my personal situation, I have a hard time understanding how the changes advance “fairness”)
I worked at the University of Alaska for about 17 years. During the first part of my tenure, university employees participated in Social Security, with associated payroll taxes withheld from our checks. During the latter part of my tenure, the university withdrew from participation in Social Security, so, of course, we no longer paid the “employee’s share” of FICA taxes. This arrangement has had implications for my Social Security retirement benefits under a rule called the Windfall Elimination Provision or WEP. Social Security can reduce benefits for individuals receiving a pension from work not covered by Social Security, e.g., my Alaska defined benefit pension. So, my Social Security benefit checks have, indeed, been less than would have been the case had the university not withdrawn from the SS system.
Relatedly, the university established a special program wherein it took the funds that it would have used to pay the “employer’s share” of SS taxes and used those funds to establish a “Group Retirement Annuity” for the affected employees. I now take Required Minimum Distributions from that plan just as I do from my 403(b) account. I did the calculations and estimated that I am better off financially with this system than I would have been had the university stayed in Social Security during my entire time in Alaska.
In January of this year, President Biden signed the Social Security Fairness Act. One of the provisions of that act was to repeal the Windfall Elimination Provision. This means that my Social Security retirement benefits have been adjusted to the level they would have been, absent the effect of WEP. In my case, this increased my monthly benefits payment by just under 27%. Accounting for Medicare premiums withheld from my SS checks, my monthly net benefit has increased by 40.5%.
The “Fairness” act was made retroactive to January1, 2024. I received a nice one-time payment earlier this month to cover all of 2024.
I don’t know the full damage the “Fairness” act has done to the finances of the Social Security program. And I’m still waiting for someone to explain the “Fairness” part.
Bill
Mar 16 2025 at 10:55am
David Rose wrote a very informative piece on WEP and the Social Security Fairness Act a few months ago: https://thedailyeconomy.org/article/social-security-fairness-act-rose/
Monte
Mar 15 2025 at 6:34pm
In 2004 when Bush Jr. was re-elected, I’d hoped that his initiative to partially privatize SS would be successful, which would have allowed workers to privately invest a portion of their pre-tax earnings – a positive step towards ending this Ponzi scheme. But in the aftermath of Hurricane Katrina, “with Democrats uniformly opposed and Republicans in disarray”, the plug was pulled.
The best we can hope for at this juncture is a bipartisan solution to return solvency to the program, for which Brookings has provided a blueprint.
Thomas L Hutcheson
Mar 15 2025 at 10:28pm
Regardless of what is done to make SS/Medicare/ACA/unemployed insurance revenue neutral, we really should increase the tax incentives for saving out of income for “retirement.”
Monte
Mar 16 2025 at 2:13am
That and other incentives. The sad reality is that our youngest cohorts believe saving for retirement is a fool’s errand. They’ve developed an irrational fear of the future due primarily to predictions about climate change that has fostered a “live for today” mentality. The psychological barriers they’ll need to overcome are enormous.
Ike Coffman
Mar 16 2025 at 8:44am
My experience is that allowing workers to privately invest a portion of their pre-tax earnings would NOT have been a positive step for retirees.
Warren Platts
Mar 16 2025 at 8:56am
Tell me about it!
Monte
Mar 16 2025 at 11:53am
I sympathize with your circumstances, Ike, but the majority of Americans who’ve participated in retirement plans, particularly those who invested in the stock market through 401(k)s, 403(b)s, or IRAs have generally experienced adequate or even substantial returns over the last 40 years compared to those who haven’t. How does this diminish the case that workers should invest a portion of their pre-tax earnings in the stock market for their retirement?
Ike Coffman
Mar 16 2025 at 1:36pm
Because you are proposing changing something known, something dependable and consistent, with something that is unreliable and subject to luck and chance.
Monte
Mar 16 2025 at 4:35pm
Reliable and consistent aren’t the words I’d use to describe SS. Regardless, the option to partially divest from the program and invest in the market ought to be made available to taxpayers.
Warren Platts
Mar 16 2025 at 8:55am
I am reminded of a meme I saw the other day that said “When I was young, I was poor, but after a lifetime of hard work, I am no longer young.” The SS trust fund ran surpluses for decades, but it invested in the other half of the government. So it is no surprise the rate of return has been rather low…
Jose Pablo
Mar 16 2025 at 9:14am
The key normative question is: What should a Social Security system aim to achieve? This is fundamentally a political discussion. Once a clear objective is established, the technical implementation of that solution becomes a much simpler practical matter.
The guiding principle should be that individuals are responsible for saving for their own retirement. The private financial market already offers numerous investment products that can effectively serve this purpose. Why should the government step in to provide this service? (Spoiler: It would likely lead to inefficiencies and mismanagement)
The government’s role should be limited to ensuring that all retirees receive a minimum income sufficient to avoid poverty in old age. The justification for this intervention is twofold:
Many individuals fail to plan adequately for retirement.
Some individuals—whether due to bad luck, low earnings, or other factors—simply won’t have accumulated enough savings to sustain themselves.
This system would effectively function as a Universal Basic Income (UBI) for retirees. With 58 million Americans over 65, a guaranteed minimum annual income at the federal minimum wage level (~$15,000 per year) would cost approximately $975 billion annually, which is actually $200 billion less than the current Social Security retirement expenditures.
The most efficient funding mechanism for this program would be a Value-Added Tax (VAT), as Thomas has pointed out. Given that U.S. consumption is around $20 trillion annually, a 5% VAT would generate sufficient revenue to fully fund this “retiree UBI” program.
As part of this shift, payroll taxes would be eliminated entirely for both employees and employers. The employer’s share of payroll taxes would be directly added to employees’ wages, resulting in higher take-home pay for workers. This would make the transition revenue-neutral for businesses while giving workers more control over their finances and retirement planning.
Crucially, it should be mandatory that this program is exclusively financed through a VAT. This ensures that any future expansion of benefits (which is almost inevitable) would come with the visible political cost of raising VAT rates, forcing a more transparent and accountable policy discussion.
This system is as simple as it gets. It eliminates the complexity and inefficiencies of the current Social Security bureaucracy, abolishes the retirement advisory industry, and redirects the talents currently wasted on navigating retirement regulations toward more productive endeavors.
Jose Pablo
Mar 16 2025 at 9:24am
58 million people over 65 times 15,000 dollars per year is a cost of 870 million, (no 975). Around 300 million dollars less than the actual cost of the system
Thomas L Hutcheson
Mar 16 2025 at 9:28am
I like it. What that income should be and under what circumstances/age one should begin receiving it is a separate discussion (and should not be driven by matching current revenues to eliminate the deficits of SS and Medicare .
Jose Pablo
Mar 16 2025 at 9:58am
it is a separate discussion
Yes, a political one. The specific proposal in my comment just served to illustrate that “reasonable numbers” match.
The fact that the cost of the program HAS to be financed through a very visible VAT tax should make that political discussion “sensible” (at least as “sensible” as any political discussion may be)
Ike Coffman
Mar 16 2025 at 12:14pm
I see a lot of flaws in your plan. 15k at what age? 62? 65? 67? Physically demanding job vs desk job? What about Medicare, which also comes from payroll taxes? Healthy vs unhealthy retirees?
I also see a lot of potential for fraud and abuse from corporate interests. I already have several personal examples of significant financial harm from supposedly regulated financial institutions. Would there be a pay cap for company leaders who receive an infusion of cash not because of company fundamentals but due to political or meme effects? I have tons (yes, literally tons) of concerns.
Jose Pablo
Mar 16 2025 at 4:19pm
15k at what age? 62? 65? 67?
All individuals over 65 would receive it, it’s a UBI for retirees. Provisions for early retirement could be introduced, and the exact figures can be adjusted as needed. The key point is that any specific design of this UBI program would determine the VAT required to fund it.
Healthy vs unhealthy retirees?
No, there would be no differences, all retirees would receive the same amount.
However, these questions are somewhat misplaced since current Social Security payments are not based on health status or age beyond the standard retirement thresholds.
What about Medicare, which also comes from payroll taxes?
Medicare Part A and Unemployment Insurance could be kept as they are (or reformed too, which is irrelevant to this discussion). The OASDI program would be eliminated, reducing payroll taxes by approximately $1.2 trillion, and replaced with a VAT generating a similar amount.
I don’t get your last paragraph. If your objection there is ideological, that is a normative discussion. Everyone is entitled to their opinion. This proposal assumes a broad consensus is reached to replace the current, flawed, and unsustainable system with a UBI for retirees. It is not intended as a solution to issues related to the regulation of financial institutions.
Ike Coffman
Mar 17 2025 at 12:20pm
My last point is that, because of the design of the SS system, nobody gets rich, and that includes the administrators, directors, etc. To expose the amount of money that SS involves to the market and market forces is to expose that money to increased fraud. Who knows how many creative ways financiers and the financial companies who hire them would come up with to tap into that money? People, companies, organizations would all have the potential to benefit in big ways.
But that is not the whole issue. We are talking about massive new sums invested in the stock market. Who gains the most? People who already have significant money invested. I am not talking about the nickel-dime couple hundred thousand, I am talking about those with hundreds of millions invested or able to invest. Private equity, certainly, but besides certain already public billionaires I have no idea who or what organizations control or has access to mind boggling sums. We do know the stock market is one of the mechanisms for income inequality.
We know who controls SS. Greed knows no boundaries. I prefer a known system with flaws to an unknown system.
Jose Pablo
Mar 17 2025 at 5:32pm
I prefer a known system with flaws to an unknown system.
This certainly makes finding new solutions that can satisfy you very difficult.
Jose Pablo
Mar 16 2025 at 9:26am
Regarding the transition from the current system to the “UBI for retirees,” the process would also be straightforward.
For current retirees and those over 60, the existing system would remain in place. This would be financed by a 6% VAT, with a tax base based on the $20 trillion of annual consumption in the U.S., which would cover the current annual cost of approximately $1.2 trillion. Additionally, these individuals would continue to make contributions through payroll taxes, which would provide extra income to the system.
For individuals under 50 (or any other age threshold to be defined), they would be transitioned entirely to the new system.
Those between the ages of 50 and 65 would have the option of either staying in the current system (with pensions calculated according to the existing rules and continuing payroll contributions) or switching to the new system.
Mike Burnson
Mar 17 2025 at 10:10pm
Another great article, thank you. I have said for decades that the failure to teach “time value of money” is a deliberate effort by the “education” system to instill dependence on government. By promoting SS and criticizing “risky” stock market performance (typically likening stocks to a casino), the myth of security from Social Security is perpetuated.
Knut P. Heen
Mar 24 2025 at 11:04am
I think Samuelson had in mind a perpetually growing population. Something in the order of four children paying pensions to two retired parents have been the case through most of history. The problem we face today is one single child paying pensions to two retired parents. That is four times as expensive. Adding the fact that those parents also live longer makes it close to unsustainable.
I wonder whether the declining birth rates are related to the introduction of social security around the world. Having many children used to be seen as insurance against both disability and old age. Raising children is expensive, but social security payouts are independent of how many children you have produced. We should therefore expect free-riding in the production of future tax-payers.
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