I reached a middle-age milestone this year: my oldest child got married and moved out — one down, three to go. My daughter and son-in-law, ages 19 and 21 and both employed, quickly learned about the payroll tax. Like the rest of us, they see 12.6% of every paycheck taken by the government and handed over to people like my upper-middle class parents, who definitely don’t need it.
That’s Social Security for you: a perversion of traditional values about saving, investment, and wealth transfers. Generally speaking, wealth should voluntarily flow from the old, who can’t take it with them, to the young, who could use a financial boost.
Sure, we might want a government program to stabilize incomes for the elderly poor who lacked the wherewithal to save or who risk outliving their own wealth. But a program that pays out based strictly on age, and not need? That’s not “social insurance.” That’s intergenerational plunder and a looming fiscal train wreck. It has to stop.
Everyone knows Social Security is broke and broken. The program has been paying out more than it takes in 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, seems 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, lower earners pay proportionately higher shares of their income to Social Security. Stabilizing the program would require 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 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 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. This can be either a lump-sum, which the participant gets to invest and manage, or a more reliable alternative annuity contract. The company fixes its finances by offloading its pension obligations. Workers who accept buyouts gain greater security and control over their entitled funds.
Here’s how a Social Security buyout would work: 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 ensure success and forestall regret, I will further commit to investing, within my IRA, the amount of my payroll tax reduction. Because I still have decades to invest before retirement, I will come out ahead compared with 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 their scheduled Social Security benefits. According to 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. If a tax-saving buyout were offered continually starting now, Social Security would be stabilized when about 20% of workers opt out, with no changes to benefits, to retirement age, or to tax schedules for those who choose to stick with the program.
If you like your Social Security plan, go ahead and keep it, and good luck to you. But let me (and millions more) out, and save the program. I never wanted Social Security anyway, and I’m better off investing on my own. Most importantly, I can stop plundering my children, increase my investment in America’s future, and feel good about being part of the solution.
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Tyler Watts is a professor of economics at Ferris State University in Big Rapids, Michigan.
The views expressed in this piece are those of the author and do not necessarily represent those of The Daily Wire.
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