WASHINGTON, DC – MAY 05: U.S. Sen. Elizabeth Warren (D-MA) speaks during a press conference on social security in front of the U.S. Capitol on May 05, 2025 in Washington, DC. Democratic members of congress spoke about how President Donald Trump’s and Elon Musk’s Department of Government Efficiency’s (DOGE) cuts are impacting social security. (Photo by Kayla Bartkowski/Getty Images)
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The Social Security system might have been a good idea in 1936, when seniors faced the collapse of asset values in the Great Depression — including the devaluation of their bank savings in 1933 – while their adult children were also out of work and struggling to feed their own children. The original tax rate was 1% paid by both employer and employee, or 2.0% combined. It reflected a world in which about 6.3% of the population was over Age 65, compared to 18.9% today, or 22.0% in 2040.
It might have been a good idea in 1950, when the ratio of payers to recipients was 16.5:1, and the tax rate had climbed to 3.0% combined.
But it is definitely not a good idea in 2026, or for the foreseeable next fifty years. At present, there are about 2.7 workers paying into the system for every beneficiary. By 2035, this is expected to fall to 2.3. The combined payroll tax to pay for this is now 15.30%, not the 3.0% of 1950. But that is not covering the bill. Payroll tax revenue covered 91.2% of expenditures in 2024, and that percentage will go down. The Social Security system itself is drawing on its retirement savings, as it has since 2010.
Pretty soon the Social Security retirement savings fund (known as the Social Security Trust Fund) will run out. The Congressional Budget Office now expects this Trust Fund to be depleted by 2032, at which time either taxes will rise or benefits will be cut, by as much as 28%. But this “Trust Fund” is itself something of a figment of Congressional imagination. Basically it is a commitment by the Federal Government to fund Social Security payments. Since the Federal Government already has a big deficit, the only way to fund these is to issue more debt. So, indirectly, Social Security is already being funded by debt issuance. There is no external “supply of funds” that it is drawing on.
Today, this is a fundamentally demented system. Most Social Security recipients are not needy. Boomers today are the wealthiest generation. The largest Social Security payments go to those who paid the most into the system – in other words, the people who had the highest incomes during their career, and who probably have the most assets and other resources to draw on during retirement.
As the pushing comes to the shoving, you will hear more and more talk about how to “fix” Social Security – such as recent proposals to remove a cap on higher incomes. The Tax Foundation called this “the largest tax increase in decades – and it still wouldn’t save Social Security.” Another “fix” would be to issue a flat payout, a kind of Universal Basic Income for Seniors, which would have the effect of reducing payments to the people that probably need it least – those that had the highest incomes during their working years.
But, I think that we should forget about all this talk about “saving” and “fixing” something that is basically demented – 2.3 workers per retiree – and completely inappropriate for the current and forseeable situation.
I suspect that Social Security will basically go up in flames through a process of incipient Sovereign Default leading to currency depreciation – a pattern that is already quite evident today. The US Federal Government, despite having 6%-of-GDP deficits into the forseeable future, will never default on its debt. But, the currency might lose value, just as it has been losing value already, but a lot more when things get serious.
Basically, the US Social Security system might end up like the Soviet pension system. You still get paid, but the money isn’t worth anything anymore. In other words, just like today, but a lot more.
The likely replacement would be some kind of “provident fund” system, basically a kind of universal 401(k) system invested in real-world private sector assets. There would be no more payroll tax (as we know it) and no more Social Security. There still might be some kind of needs-based welfare program for seniors. This combination of a primary Provident Fund system, with a welfare backup, is already common worldwide, including systems in Singapore, Mexico, India, and … Kenya.
By one calculation, if retirees today were able to invest in a private-sector account the same amount of money they paid in payroll taxes during their working life, the average account would be worth about $3.7 million today, and would pay about $15,523 per month – and when you die, the remaining assets would go to your children, who would add them to their own private accounts, making the wealth pile even bigger. This is perhaps a little too rosy, considering that US stock values are about the highest in history. But, it illustrates how much better a private account could be.
Not everyone would enjoy such benefits. But even if things were not this great going forward – even if they were just 25% as great – it would still be pretty good. There wouldn’t be many people that somehow fell short.
Probably, this would require some kind of legal structure that protects these investments for the whole working life of a person. They would not be touchable in divorce, bankruptcy, or other legal challenges or con artists. It has to last to Age 65, and beyond. Whether retirement fund contributions would be “mandatory” (like payroll taxes today) or not, or what the contribution rate should be, is another interesting question. We could leave the determination of a mandatory contribution rate up to State governments, further distancing the Federal government from the whole business.
But, I think we should see a move away from relying on financial assets for 20+ years of retirement altogether. Disasters happen. The question of what to do with the elderly has been a part of human society for all time – even back to the hunter-gatherer days. And the answer has always been the same: The elderly live with their adult children or broader extended family, with a few relying on other sources such as church charity. Somewhere between the death of the old system – including the Social Security system – and the birth of the new, we might see a renewal of this ancient retirement plan. This is what happened throughout Russia and Eastern Europe in the 1990s, after the collapse of the Soviet Union – and it might not be a bad thing.
All of this can help us return to the Limited Government vision of the Founders – a United States without payroll taxes, and without income taxes. The Federal Government, which today is basically a big firehose sucking money up from working people and delivering it to seniors (Social Security and Medicare), would again follow its Constitutional mandate to get out of the welfare business entirely. This is cheap: In 1913, the Federal Government spent about 2.5% of GDP, compared to about 23% today. With such low spending needs, the whole bill could be covered with a modest Federal Sales Tax or, better yet in my opinion, a little Federal VAT of about 4%.