Although Social Security is an unconstitutional relic of the New Deal, some libertarians never tire of proposing ways to reform the system.
Social Security is properly labeled the federal Old-Age, Survivors, and Disability Insurance (OASDI) program, which provides monthly benefits for retirement, disability, survivorship, and death. Although it was established in 1935, employers and employees did not begin paying Social Security taxes until 1937. The first Social Security benefit checks were issued in 1940. The program currently pays benefits to about 67 million people, with an estimated 183 million people paying Social Security taxes on the first $174,900 of their earnings.
From the very beginning, Social Security was a pay-as-you-go system in which the benefits paid out did not correspond to the taxes paid in. For example, the first person to receive benefits paid total taxes of $24.75 but received, by the time she died at age 100, a total of $22,888.92 in benefits. As long as more people were paying into the system than people were retiring, the system was sustainable (though certainly not moral or constitutional). Such is no longer the case.
According to the 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds:
Under the Trustees’ intermediate assumptions, Social Security’s total cost is projected to be higher than its total income in 2024 and all later years. Total cost began to be higher than total income in 2021. Social Security’s cost has exceeded its non-interest income since 2010.
OASDI cost has generally increased much more rapidly than taxable payroll since 2008 and is projected to continue to do so through about 2040.
In this period, the retirement of the baby-boom generation is increasing the number of beneficiaries much faster than the increase in the number of covered workers.
Under the intermediate assumptions, the projected hypothetical combined OASI and DI Trust Fund asset reserves become depleted and unable to pay scheduled benefits in full on a timely basis in 2035. At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 83 percent of scheduled benefits.
What this means is that the Social Security program is not only in financial trouble: it is unsustainable at current benefit levels without massive infusions of cash from the general fund.
One of the main “libertarian” approaches to Social Security reform is privatization. It is often pointed out that some member states of the Organization for Economic Cooperation and Development (OECD) have fully or partially privatized their government pension systems. This includes the countries of Australia, Chile, Columbia, Costa Rica, Denmark, Estonia, Greece, Iceland, Israel, Latvia, South Korea, Mexico, the Netherlands, Norway, Sweden, and Switzerland.
In the United States, Social Security is funded by a 12.4 percent payroll tax (split equally between employers and employees) on the first $176,100 of employee income. Self-employed persons pay the full 12.4 percent tax.
Under a Social Security privatization scheme, some or all of every American worker’s Social Security tax withheld from his paycheck would go into a personal retirement account and be invested like money in a 401(k). The amount of retirement benefits would depend in full or in part (depending on what percentage of Social Security tax is put into a personal retirement account) on the amount of worker contributions and the success of his investment strategy. And unlike Social Security, if a worker died before retiring, his heirs would inherit any funds accumulated in his personal retirement account.
Advocates of personal retirement accounts always maintain that workers will have more retirement income than under Social Security, but there is no guarantee of this. It is just like saying that stocks will always go up and home values will always increase.
The transition costs of moving to personal retirement accounts are huge. If younger workers are allowed to divert some or all of their payroll taxes to personal retirement accounts, then—because Social Security is a pay-as-you-go system—there will be much less money to pay current retirees their Social Security benefits.
But neither of these is the real problem with Social Security privatization.
The real problem with Social Security privatization is that it is not private at all. It is just privatized coercion.
It is the government that decides whether someone should save for retirement.
It is the government that decides what percentage of a worker’s income would be put into a personal retirement account.
It is the government that decides what percentage of a worker’s income that employers must put into employees’ personal retirement accounts.
It is the government that decides what retirement funds could be invested in.
There is nothing libertarian, free-market, or private about the government’s forcing Americans to transfer a portion of their paychecks into a retirement account.
It is neither constitutional nor the proper role of government to have a retirement, disability, annuity, savings, or investment program or force people to have one.
It is neither constitutional nor the proper role of government to provide a safety net; help the sick, disabled, or elderly; keep anyone out of poverty; or transfer money from one American to another. All charity should be private and voluntary.
A real personal retirement account is voluntarily funded. A Social Security privatization personal retirement account is coercively funded.
It is individuals—with the assistance of family, friends, employers, books, websites, organizations, and investment advisors—who are responsible for ensuring that they have money put aside or invested to retire on or take care of their loved ones in the event of their death or disability.
