It’s common knowledge that Social Security is both financially strained and riddled with inefficiencies. The most recent OASDI Trustees Report indicates that since 2021, Social Security has been disbursing more funds than it collects from payroll taxes and its trust fund. Projections suggest that by 2033, the trust fund could be fully depleted, leading to only 79% of promised benefits being paid unless significant reforms are introduced.
However, reforming Social Security is akin to attempting to move a mountain. The elderly represent the most dependable voting demographic, and no rational politician would dare to alter their entitlements, lest they invoke the ire of the AARP—just ask Paul Ryan or George W. Bush about their ill-fated attempts. Proposals to raise payroll taxes face similar opposition; unlike the progressive structure of personal income tax, lower earners contribute a higher percentage of their income to Social Security. Currently, only the first $176,000 of payroll income is taxable. Many reform suggestions entail lifting this “wage base,” but realistically, stabilizing the program might require tax increases that affect everyone—a political impossibility.
To truly address the Social Security crisis, we must innovate rather than tinker. Adjustments to retirement age or tax rates will merely scratch the surface. What we need is not just reform but a radical departure from the status quo: a buyout.
For decades, companies have effectively utilized buyouts to alleviate unfunded pension liabilities. In essence, a buyout allows workers to exit a retirement plan in exchange for a financial incentive. Typically, those opting out receive a lump sum to invest as they see fit; sometimes, a stable annuity from a reputable financial institution is offered. These buyouts are voluntary and inherently beneficial: companies relieve themselves of pension obligations while workers gain greater autonomy and security over their finances.
Consider my personal proposal for a Social Security buyout: I would renounce my entitled benefits at retirement age in exchange for a gradual reduction in my share of payroll taxes. I’ve calculated a 10-year phased reduction of the employee’s Old Age tax from 5.3% down to zero. This arrangement would yield a win-win scenario, as Social Security does not invest tax contributions but instead pays them directly to current retirees—an arrangement akin to a Ponzi scheme. The returns for most participants are dismally low, often trailing behind stock market index fund returns. A buyout could provide a significantly greater rate of return, enhancing net wealth. To appease those concerned about potential mismanagement of funds, legislation could stipulate that buyout participants invest their tax savings in an IRA or similar qualified plan. With decades left to invest before retirement, I would likely come out ahead compared to what Social Security could provide. Many others share my sentiment, preferring self-funded retirement and likely opting out if the buyout value exceeds the net present value of their expected benefits from Social Security.
Preliminary calculations indicate that a Social Security buyout could be particularly advantageous for workers aged 45 and under, especially those in the upper half of the income spectrum. For the government, the financial benefits of such buyouts would be realized gradually—savings may not be apparent for 15 to 20 years, at which point benefits would cease for those who opted out first. Initially, cash flow may be negative as the payroll tax is phased out for buyout participants, but existing trust fund assets and ongoing payroll taxes could absorb these early losses. As these buyout participants reach retirement age, Social Security could revert to generating surpluses. In the meantime, taxpayers could see increased personal wealth and a boost in real investment within the U.S. economy.
Predicting the cash flows from such a voluntary buyout initiative is challenging given the scale of government involvement, but evaluating investment performance for both individuals and the Social Security system is straightforward. The policy proposal includes spreadsheet models that calculate internal rates of return and present value for both parties. These models illustrate substantial potential gains for millions of participants. If a sufficient number of individuals accept these carefully structured buyouts, Social Security could achieve solvency—and here’s the most remarkable aspect: this can occur without altering benefits, retirement ages, or tax schedules for those who choose to remain in the system.
My disdain for Social Security is well-documented, and while libertarians and conservatives may focus on its moral and financial shortcomings, the program remains popular and politically charged, with significant entrenched interests. Any proposal to improve Social Security’s fiscal situation will require political negotiations that respect existing commitments, avoid drastic changes, and highlight clear mutual benefits. With the political landscape shifting and a hint of fiscal responsibility emerging in Washington, perhaps the moment is ripe for such an unconventional proposal.
You can find the full policy paper here: https://inpolicy.org/2024/12/white-paper-the-art-of-the-deal-a-win-win-proposal-to-save-social-security/
Comments, suggestions, and questions are welcome: tylerwatts@ferris.edu
