In my ongoing exploration of Social Security, I previously presented two segments from my book The Joy of Freedom: An Economist’s Odyssey.
The first segment, titled “Social Security is a Ponzi Scheme,” was published on March 11, 2025, followed by the second installment, “Flawed from the Start and Ponzi versus Stocks,” on March 14, 2025.
Now, we arrive at the final segment of this discussion. Keep in mind that the statistics referenced are outdated, as this was penned in late 2000 or early 2001. Additionally, reforming the system has become significantly more challenging since that time.
The Injustice of Social Security
Picture a scenario where a percentage of your income is withheld annually, with the promise of its return, plus interest, upon reaching the age of 65. However, you’re currently 29 and facing a critical health issue like AIDS, making it unlikely you’ll see 65. You urgently require that money for pressing medical expenses, rent, and groceries, yet the system refuses to release it.
This situation encapsulates the essence of the Social Security framework. Regardless of your immediate financial needs, the government remains steadfast in its refusal to grant access to those funds. Should you seek an exemption, the bureaucratic machinery would deny you, as no such option exists. You find yourself trapped, with your personal circumstances deemed irrelevant by federal policy.
While the AIDS example is extreme, it highlights a broader issue affecting countless individuals in less dramatic situations—those with health problems unlikely to collect on their benefits. For instance, smokers, who statistically have shorter life expectancies than nonsmokers, contribute no less to Social Security despite expecting to receive fewer benefits. Similarly, demographic disparities exist; for example, a 40-year-old Black man in 1996 had an estimated lifespan of 71 compared to 76 for his white counterpart, meaning he would likely collect benefits for only five years versus ten.
Further inequities arise in the treatment of government workers, who can evade Social Security while still qualifying for benefits after a decade in covered employment. I don’t propose extending Social Security to these workers from the outset; rather, I highlight how they possess an unfair advantage over the rest of us.
Social Security is Not Guaranteed No Matter How Much You’ve Paid
Consider the case of Ephram Nestor, a Bulgarian immigrant who, after years of contributing to Social Security, was deported in 1956 due to a Communist affiliation from decades prior. Following a Congressional decree that stripped deportees of their benefits, Nestor legally challenged this decision. Ironically, the Supreme Court ruled against him in Nestor v. Flemming, affirming Congress’s right to modify the system at will, effectively telling him, “tough luck.” In essence, the court’s ruling implied that the notion of “accrued property rights” within Social Security would hinder its necessary adaptability.
Abolish Social Security in Slow Motion
First, we must confront an uncomfortable truth: we have been misled. The so-called trust fund is a mirage, and the Social Security system resembles a poorly constructed Ponzi scheme that ultimately benefits few. The most pragmatic approach to address these systemic flaws is to phase out Social Security entirely, liberating individuals to determine their own savings strategies.
Investing in broad stock indexes like the S&P 500 or Russell 2000 could yield returns multiple times greater than those offered by Social Security. Those preferring bonds for stability could opt for them, while others might choose to invest in real estate or continue working later in life. The crux of this argument is that financial freedom empowers individuals to make informed decisions about their finances.
While many may lack investment expertise, they can hire professionals for guidance, similar to mutual fund investments. Importantly, each person possesses unique insights into their desires and needs for retirement savings.
Would people save for retirement in the absence of Social Security? Skepticism prevails, particularly given the low savings rates of nearing-retirement households. For example, in 1991, the median financial assets for households headed by individuals aged 55 to 64 were merely $8,300. Critics often miss a key point: Social Security itself discourages savings. As Martin Feldstein noted, average earners retiring at 65 with a “dependent” spouse typically receive benefits equating to about 63 percent of their pre-retirement income, tax-free—essentially reducing the incentive to save.
Most Americans would fare better without Social Security, yet the transition poses significant challenges. A two-pronged approach is necessary: first, measures to preserve Social Security without imposing tax increases, and second, a gradual phase-out of the program.
To stabilize Social Security without raising taxes, three reforms are essential: (1) increasing the retirement age, (2) recalibrating the benefits formula, and (3) adjusting how benefits are indexed. The retirement age, originally set at 65 in the 1930s, should reflect contemporary life expectancy and work conditions, potentially rising to 70 in stages.
While raising the retirement age may disproportionately affect groups with shorter lifespans, provisions could be made for early lump-sum payouts for those expecting to live shorter lives. This would prevent them from being abandoned by the system in their later years.
Additionally, the current benefits formula guarantees real benefit increases in line with rising wages. Instead, benefits could be frozen in real terms, limiting growth to current levels. Furthermore, Social Security benefits are tied to the Consumer Price Index (CPI), which has historically overstated inflation; adjusting benefits to reflect more accurate inflation measures could further mitigate funding issues.
Even after these reforms, we would still contend with a government-operated Ponzi scheme. The government has no business dictating how much individuals should save for retirement. Thus, we should aim for a gradual phasing out of Social Security.
Why a gradual approach? Because Social Security has created a dependency cycle, requiring current and future retirees to rely on younger generations for benefits. To initiate the transition, we could start by informing individuals under 30 that they will not receive benefits, simultaneously lowering their payroll tax contributions to facilitate personal savings.
A substantial portion of Generation X already believes Social Security will not be available for them; this proposal merely aligns with their skepticism while offering them reduced tax rates. Over several decades, this would lead to the near-complete abolition of Social Security.
While this solution may not be perfect for young workers—who would benefit more from investing their entire contributions—it represents a necessary step toward alleviating the burdens of a flawed system. If a 20-year-old invested just 5.6 percent of their income in stocks until retirement, they could potentially achieve a retirement income significantly greater than what Social Security promises.
Moreover, I propose allowing individuals aged 45 and older, with at least ten years of contributions, to exit the Social Security system permanently. Such individuals would forfeit their claims to past contributions and future benefits but would no longer incur Social Security taxes—a worthwhile trade-off for those valuing personal financial autonomy.
One Possibly Bad, and Two Definitely Bad, Proposals for Social Security Reform
Several economists and politicians have suggested alternative reforms for Social Security. One such proposal is privatization, which would allow individuals to retain a portion of their payroll taxes in personal accounts. However, many privatization models still mandate savings, limiting individual choice and freedom.
Another proposal involves the government investing in stocks, which could lead to substantial government ownership of U.S. companies. This scenario raises concerns about government overreach and the potential for poor investment decisions, as evidenced by past failures.
Lastly, some advocate for an “affluence test” for Social Security benefits, penalizing higher earners. This approach not only complicates enforcement but also unfairly punishes savers while rewarding spenders, thereby creating further economic inequities.
Conclusion
The government cannot be entrusted with our retirement savings. Officials are generally more concerned with short-term political gains than with sustainable long-term planning. While some reforms could stabilize the existing system, they would still perpetuate a fundamentally flawed Ponzi scheme, imposing arbitrary wealth redistribution. Abolishing Social Security is the most viable solution, allowing individuals the freedom to manage their own retirement savings effectively.
