Let me start by saying there are immense benefits to the Social Security system. Millions of Americans rely on social security to lift them out of poverty in their retirement years. Without it, the decline of quality of line would be significant and measurable.
But, we must realize that Social Security has some systemic issues that need to be addressed.
First, and foremost, social security is facing a large budget shortfall in the coming few years. The 2026 annual trustees report stated that the trust funds will be depleted in 2034. When that happens, an automatic 17% cut to benefits will kick in unless Congress acts.
Second, most Americans assume that because they’ve paid Social Security taxes for decades, they have a right to their promised benefits. It’s a reasonable assumption. You pay in; you get out. It sounds like a contract. But the law says otherwise.
A 1960 Supreme Court case, Flemming v Nestor, ruled that “the right to Social Security benefits is not an accrued property right, allowing Congress to modify such benefits”. The Court has made clear in subsequent court decisions that the payment of Social Security taxes conveys no contractual rights to Social Security benefits. This means Congress can, legally and constitutionally, unilaterally reduce your benefits, raise the retirement age, or even eliminate the program entirely.
Wait, what?
If you’re a Gen-Xer, like me, we are entering our retirement years, and now we’re learning that Congress can reduce or eliminate our social security benefits. Using the Social Security earnings record, I’ve found that in 37 years of working, I’ve contributed (well, myself and my employer share) over $400,000 into the system. Assuming Congress raises taxes and avoids the benefit cuts, I expect to receive roughly $800,000 in retirement.
Had I been able to invest my social security contributions into a private 401k since 1987, my portfolio would have grown to $2.5M by the time I retire. This means the opportunity cost of social security, for me, is roughly $1.7M.
From a retirement perspective, I feel I’ve been dealt a bad hand by social security. From a social welfare perspective, it feels like I’ve given up $1.7M to help other people. This is why it would be unfair to reduce benefits for those who paid into the system for 40 years.
But, if you’re a millennial, or Gen-Z, the situation is even worse. Congress is very likely to begin raising taxes on younger generations to fund the massive gap that exists in the system today. They will have even less ability to save for their own retirement. And who’s to say their benefits will be in the same predicament when they are nearing retirement.
So, there are 2 fundamental problems with the social security system:
1. It is not a good system for retirement savings.
2. We’ve been lied to about social security being a guarantee.
However, there is a solution to this. I call it the great ‘opt-out’. We can save social security, by weening ourselves off of it. I’ll create another blog post to describe how it would work, and how everyone wins (well, at least doesn’t lose).