Everyone knows Social Security is broke and broken. According to the latest OASDI Trustees Report, Social Security has been paying out more than its total revenue (payroll taxes and trust fund) 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, is well-nigh 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, which is strictly progressive, lower earners pay proportionately higher shares of their income to Social Security—as of 2025, the only the first $176,000 of payroll income is taxed. While many proposals to fix Social Security include simply eliminating this “wage base” and taxing all payroll income, it’s likely that stabilizing the program would require payroll 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/or 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 or desire 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. The pension plan member who opts out typically receives a lump-sum, which he/she gets to invest and manage; sometimes a more reliable annuity contract from a reputable financial company is offered. Buyouts are voluntary and therefore by nature win-win propositions: the company fixes its finances by offloading its pension obligations; workers who accept buyouts gain greater security, control, and freedom with their entitled funds.
Here’s my idea for a Social Security buyout: 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 address concerns of paternalistic ninnies who fear that buyout accepters will spend and not invest, the legislation can require buyout takers to invest, within an IRA or similar tax-qualified plan, the amount of the payroll tax reduction. Because I still have decades to invest before retirement, I will come out ahead compared to 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 the net present value of their scheduled Social Security benefits.
According to my 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. For the government, the benefits of this kind of buyout are back-loaded—they don’t really start saving money or approach fiscal balance until 15 or 20 years down the road, when benefit checks zero out for the first cohort to opt out. Cash flow would also be somewhat negative for that first 15-20 years, as the payroll tax is phased out for the buyout accepters. Social Security’s “trust fund” assets and continuing payroll taxes can cover the initially negative cash flows; once the buyout-takers reach retirement age, Social Security can again become a surplus-generating program. In the meantime, taxpayers and the general public stand to benefit immensely, with increased personal wealth and increasing real investment into the US economy.
It’s very difficult to predict the cash flows that this kind of voluntary buyout, operating under a truly massive government spending program, might entail. It is straightforward, however, to calculate investment performance for both potential buyout-taking taxpayers and the Social Security system. The policy paper includes spreadsheet models with internal rate of return and present value calculations for both individuals and the Social Security system. These simple models demonstrate the significant gains available for millions of participants. If enough people take carefully crafted buyouts, Social Security could eventually be made solvent, and here’s the best part, politically speaking: this requires ZERO changes to benefits, retirement age, or tax schedules for those who choose to stick with the program.
I’ve never liked Social Security, and I’ve long been on the record with harsh critiques. Libertarians and conservatives will probably latch on to the moralistic and/or financial critiques of Social Security, but the program remains both popular and a hot-button issue with the wider public, with HUGE vested interests and fiercely defensive political reflexes. Any proposal to fix Social Security, or even just slightly improve its fiscal stance, is going to have to involve political deal making that acknowledges sunk costs, avoids massive changes, and presents clear mutual benefits. With the ascent of Trump, the coming of DOGE, and an inkling of fiscal responsibility in the air in Washington, maybe the time is ripe for this kind of outside of the box proposal.
Find the entire 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 welcome: tylerwatts@ferris.edu
