Social Security: A $25 Trillion Time Bomb

The Social Security Administration is facing a $25 trillion time bomb within the next decade that will be catastrophic for millions of Americans if unaddressed. According to the Social Security Trust Fund, the program has until 2034 before it depletes all reserve assets. For clarity, this does not mean that Social Security will go “bankrupt” as that is impossible for a government program. It does mean that annual Trust Fund income (payroll taxes plus interest) will be insufficient to cover the outgoing expenses (retirement checks) and there will be insufficient reserves to fill the gap. The result will be an anticipated 23% reduction in benefits for existing beneficiaries.

This would be devastating for millions of seniors. A news report from the National Institute on Retirement Security found that more than 40% of seniors use Social Security as their only form of retirement income. Congress has a rapidly dwindling time to act, and unfortunately, the closer we get to the deadline, the more severe the response will need to be.

It is beyond time that we admit that Social Security is not the best program for achieving its stated ends. Two things can be true at once. Social Security has provided a benefit to millions of Americans, and that benefit is both severely weaker than the alternatives, and less than the cost.

First, Social Security is not the most efficient use of taxpayer funds for achieving the end of income security in retirement. The average monthly check from Social Security in May 2025 was $2,002.39. The average life expectancy for a Social Security beneficiary is 84 years for men, and 87 for women. Therefore, on average, a person claiming Social Security at the full-retirement age of 67, will collect, assuming a 2% annual COLA, $514,658 in lifetime benefits if they are a male, and $619,718 if they were a female. Because of the Pay-Go model of Social Security, existing taxpayers will have to raise 100% of those funds to meet those obligations.

That makes Social Security an inherently expensive program. The longer we live, and the more prices rise, the more expensive that Social Security becomes. Furthermore, because it was sold as an “insurance plan”, it is financed through individual payroll taxes (Federal Insurance Contributions Act). The smaller the tax base, the greater the tax burden, or the larger the deficit becomes. We are facing a major demographic shift, which alone is a growing problem, that has accelerated the fiscal imbalance. We are having less children each generation, with fertility rates less than replacement rates, and we are living longer. That is not a combination that can flourish in union.

Beyond its fiscal woes, Social Security has failed at its original purpose, to be an adequate insurance for the golden years. It was sold to the American electorate in 1935 as a retirement insurance program. Well, in the private sector, insurance companies collect and invest premiums so that reserves will always surpass unexpected needs, and any rise in premium is generally tied to changes in the underlying risk to the pool. In other words, prices go up solely to maintain benefits when accounting for risk. This can be distorted when governments get involved, as in the case of the health insurance industry, but in most other sectors that is not the case. For example, life insurance companies provide level premiums (either for term or permanent) for a guaranteed amount of coverage. They invest the premiums in a way that ensures the premium remains constant and the coverage is preserved.

Social Security originally was structured as a policy with a combined 2.0% tax on the first $3,000 of covered income ($68,395 in 2025). However, since its inception, Congress has raised the premium to 12.4% of incomes up to $176,100 of income. Furthermore, Social Security benefits are now subject to federal income taxes, with 85% of benefits being taxed if you and your spouse have combined income of more than $32,000 (defined income being half your Social Security benefits plus alternative fixed income like pensions or investments). Furthermore, the full-retirement age has been shifted back two years, effectively a 10.5% reduction in average lifetime benefits for men and 9.5% for women. The cost has gone up while the associated benefit has been reduced. When this happens in the private sector, as in the case of healthcare, people throw a fit and call for radical change.

The biggest problem with Social Security is that it doesn’t even provide the most adequate benefit for its recipients. We’ll consider two cases as examples, the person that Social Security was most designed to support, and the median American worker. A person who began working at eighteen years old, and spent their entire career, until sixty-seven, working the federal minimum wage, would, according to the Social Security Administration online calculator, have an initial retirement benefit of $1,330 per month. That’s an annuitized value of $198,336.

Social Security will only offer them this benefit until they die. Their spouse will only be benefited by the survival benefit if the survivor’s Social Security benefit is less than the decedent. There is no liquid benefit that can be accessed for emergencies, nor any legacy benefit for inheritance. If you don’t have a spouse, or your spouse pre-deceased you, there is no survivor benefit at all. If you die early, your estate doesn’t get to continue receiving payments or a cash-out.

Based on the contributions this individual would have made over their lifetime, this is a compounded annual growth rate of about 4.6%. Had the person instead redirected their contributions to an S&P 500 index fund during this period, the results would be astounding. The compounded annual growth rate for the S&P 500 since 1976 was about 11.59% when including reinvested dividends. Using that rate of return, the Social Security contributions for this minimum wage employee would have produced $1.75 million by age 67, nearly ten times what Social Security provided.

Unlike Social Security, this wouldn’t be a single generation benefit. If the person died two months into retirement, his or her estate would inherit the remaining value. The spouse wouldn’t have to forgo household income to claim the “spousal benefit”. There would be liquidity in case of emergency, and an actual inheritance for building generational wealth and opportunity. Social Security doesn’t provide any of these. Remember, this was for the individual intended to be most benefited by Social Security. Low-income individuals have the highest rate of income replacement by design. The higher the income goes, the lower the internal rate of return is for Social Security.

If we looked at a higher income scenario, like an individual retiring this year at sixty-seven who began working at eighteen and always made the median personal income for each year, that individual would be estimated to receive an initial Social Security benefit of $1,805.00 per month. That’s an annuitized value of $269,038 as a lump sum. Again, based on the lifetime contributions of this individual, their Social Security benefited accrued at a compounded annual growth rate of 3.5%. The compounded annual inflation rate since 1976 was 3.55%. That means that the real compounded return within Social Security for the median individual worker is negative, while the return for the minimum wage worker is only 1.05%. That’s atrocious.

Once again, if this median worker had been permitted to invest their contributions into a S&P 500 index fund, they would have accrued approximately $2.77 million for retirement in 2025. Effectively, Social Security deprived the minimum wage worker and the median worker of $1.55 million and $2.5 million respectfully.

Lastly, Social Security is a bad bargain for the nation as it reallocates dollars from productive activities to unproductive activities. It takes from younger households who likely would use the extra 12.4% of income for major consumption purchases like automobiles and homes, or private investments that translate economically into capital creation and innovation, and redirects it to elderly beneficiaries who largely consume it on non-durables. In other words, it is redirecting financial resources from consumption of durables and private investment, which collectively generate economic growth, towards consumption of non-durables, that do not.

Social Security is a bad bargain for the taxpayer, for the beneficiary, and for the nation. It is high time that we accept this and begin to look at alternatives. Rejecting Social Security in its current form does not mean we have to reject the idea, which has been accepted into the American ethos, that we should provide a framework for the golden years of our life and assist the elderly within our society. Reform and restructuring does not mean dissolution.

There are many reasonable concerns over efforts to “privatize” Social Security (more adequately labeled “individualizing”, as it is still controlled and administered by the government). Each of these are grounded in reality and should be adequately addressed to ensure a fair and effective transition. These concerns can be summarized into five major points.

(1) Removing the payroll taxes from the Trust Fund will inevitably deprive existing seniors of their promised benefits. We cannot simply yank the carpet from under their feet. This is a serious critique that needs to be addressed or else it will both be politically and economically catastrophic for the country.

(2) Investing is inherently risky and therefore we are trading a “guarantee” for a “possibility”. For most Americans who do not have significant experience and knowledge of the market, this is a reasonable concern.

(3) Individuals are largely ignorant of what they do not know and are also impulsive and emotional beings. What is to stop bad behaviors or bad knowledge from derailing the retirement plan.

(4) This plan will inevitably cause inequality. How are we to ensure that those of us who have lower incomes are not left behind? This is mostly a concern among those on the political left, but nevertheless, it should be addressed.

(5) I have paid money into Social Security. Why should that now be considered a “sunk-cost”. Why should the promise be broken for me? This is the one that most people find difficult to overcome and needs to be at the heart of a reform proposal.

With these critiques/concerns outlined, let’s proceed with constructing a reform package that transitions us to a more efficient Social Security system, while addressing each of the reasonable concerns that will arise from such an effort.

First, we need to address how we ensure that existing and future seniors do not have the rug pulled out from them. The answer to this is actually quite simple. We need to acknowledge that Social Security as an insurance program has failed. It is not an insurance program; it is a redistribution program. This may seem obvious, but it is important for salvaging the program for existing beneficiaries. If Social Security is not an insurance program, then it doesn’t inherently need existing policy holders to pay premiums, nor a Trust Fund that remains solvent. Moving the Social Security system out of the Trust Fund and onto the general budget (like Medicare Part B and Part D), means that there is not deadline for its inevitable insolvency.

Existing revenue from any source can fill this gap. It then becomes a debate over which tax we wish to use to cover the newfound deficit. My recommendation would be a Business Transfer Tax, which taxes the gross receipts of corporations, minus any capital investments, at a flat rate with no deductions, exemptions, or loopholes. This was a proposal made by both Senators Rand Paul of Kentucky and Ted Cruz of Texas during their 2016 presidential campaigns. The Tax Foundation found, a decade ago, that this plan would produce sufficient revenue over a decade to replace the revenue collected by existing payroll taxes, corporate income taxes, and capital gains taxes.

This would be a more transparent, efficient, and effective form of taxation then our current structure, and it immediately solves the short-term financial issues of the Social Security Administration. Seniors would have the confidence that their checks would be certain until they die, and workers wouldn’t need to continue passing their payroll to the SSA. Concern one has been addressed.

We can also address Concern 5 simultaneously. Moving forward under this proposal, traditional Social Security would be frozen. This means that all benefits earned to date would be preserved, but no new benefits would accrue. The way Social Security calculates your Primary Insurance Amount (PIA) is by taking the thirty-five highest years of earnings, adjusted for the growth in average wages, and takes an average to produce your Average Indexed Monthly Earnings (AIME). They then apply three bend points, that determined income replacement, to make it progressive. The lowest bend point enables you to retain 90% of the first $1,226 of your AIME; the second retaining 32% of the next $6,165 of earnings, and 15% thereafter until the maximum.

You have to have forty quarters of qualified earnings (10 years) to be eligible for Social Security retirement benefits. If you decide to retire early before Social Security eligibility, you will still receive a Social Security benefit at the proper age, but zeroes will be added to the years you do not report wages. This proposal would simply say that everyone gets to keep what they’ve already earned.

If you are sixty-three and are about to file for Social Security, you’ve already qualified for Social Security and have almost certainly accrued thirty-five years of earnings history, so your benefit will have a negligible change. If you are younger, like mid-thirties, you probably already hit the ten years of earnings to be eligible, but you’ll just receive zeroes on your record moving forward. You’ll still receive a benefit at retirement age from the traditional system, just based solely upon your already sunk contributions. If you are really young, and have not yet accrued forty quarters of qualified wages, then we’ll just refund you your contributions to your private accounts. You haven’t actually earned your Social Security benefit. Everyone will get precisely what they’ve already bought. Concern 5 has been addressed in a fair manner.

The biggest concern about reform is fear of the market. This is largely due to lack of financial literacy. The media excels at fearmongering about virtually all aspects of human life. It’s how they get views and therefore earn money. It is true that if we look at the last eighty-two years of the S&P 500, through December 2024, we find that in 33% of years the market did finish the year lower than it began. However, short-term volatility is not a reflection of long-term growth, which is what would be important within the Social Security program. Only 12% of three-year periods reported negative returns, 7% of five-year periods, and a whopping 0% of ten-year periods reported negative returns over that same horizon.

Our worldviews are shaped by our experiences, and those of us alive during 2008 remember the anxiety that afflicted our families’ portfolios. The Dow Jones Industrial Average fell by more than 50%, closing at its trough at 6,547.05 in March 2009. For many, that is a glaring indictment of individualizing Social Security through equity markets. However, keep in mind that for someone who retired at sixty-seven in March 2009, and began working at eighteen years old in 1960, the DJIA averaged 601.70 in April 1960. That’s a compounded annual growth rate of 4.88%, which is still higher than Social Security, and that’s after accounting for a 50%+ drop. Had the person just delayed their retirement by 2.5 years, they would have seen the market fully recover, and their CAGR would have been 6.15%.

The reality is that markets are incredibly volatile in the short-run, but historically have not been volatile over the long-run. Discussions about Social Security reform do not center upon the short-run, but about the lifetime accumulation by the participant. The equity markets have been far more effective at generating returns then the Social Security Administration. However, let’s entertain three basic supplemental proposals to further minimize the risk of this reform, and further addresses the final two concerns (#3 and #4).

First, like the new TRUMP Accounts, make the new Social Security program automatic in its investment allocation by either tracking a blend of the S&P 500, DJIA, and NASDAQ Composite, or a separate index that tracks the broader economy. Requiring diversification, and removing impulse and emotion from the equation, reduces both non-systematic risks and human induced risk. This addresses Concern #3.

Second, again, similarly to the TRUMP Accounts, let’s establish a baby dividend for all citizens born each year. Putting a lump sum into the account at birth makes time a key tool for the citizen and adds nearly two decades to the accumulation phase. Investing $10,000 at birth, assuming a compounded annual growth rate of 7%, would add an additional $1 million to the child’s future retirement assets. This helps to alleviate both volatility and potential reductions in CAGRs. Furthermore, it also addresses our concerns about inequality as it ensures that every person, regardless of background, has basic minimum start to their retirement earnings and wealth accumulation.

Lastly, we could still maintain at the State level, basic antipoverty programs for seniors that ensures that in the blue moon scenario where someone does fall through the cracks, that we still have a safety net to catch them and fulfill our societal promise to not have anyone retire in poverty. This welfare system would cost a fraction of the status quo, because equity markets are indeed that effective at generating wealth. After all individuals who have earned their traditional benefits have collected them and died, the annual cost to the federal government would only be the child dividend, which at $10,000, and assuming the recent average of about 3.5 million newborns a year, would cost about $35 billion annually. That’s a far cry from the $1.3 trillion we spend today.

This program moves Social Security to more effective and efficient method of redistributing resources towards providing retirement security and generational wealth, while addressing each of the valid concerns about the transition. Moreover, it also would be exceptional for the nation as it takes the current approach, which sucks $1.2 trillion in payroll taxes from durable consumption and private investment and filters it into $1.3 trillion in benefit payouts for mostly non-durable consumption; and replaces it with $1.2 trillion of direct private investment and capital creation, and the $1.3 trillion of elderly consumption would be acquired by liquidating assets that are then bought by existing workers so that they can do the same in the future. This is a system that actually directs finite resources towards capital creation and technological innovation so the economy can grow and thrive, rather than sucking resources out of productive means like a vampire, and flooding them into less productive activities. This makes Social Security a partner in economic growth, rather than an obstacle.

We are facing a ticking financial time bomb for Social Security. We can either embrace the status quo and face the inevitable benefit cuts and tax hikes, or we can finally admit that we can do better and have an adult conversation about what comes next. The choice is ours, but is it really a difficult one?