Editor’s note: This is the third of a three-part series on the challenges facing Social Security and the nation’s retirement system. In Part 1, we looked at the fiscal crisis facing Social Security. Part 2 examined how other countries were addressing similar issues. This article focuses on possible solutions and how a restructured retirement system could increase individual retirement savings while decreasing the federal government’s financial obligation.
Part 3 of 3
By ANGELO LYNN
For the past 70-plus years the conventional wisdom has been politicians don’t mess with Social Security. It has been the third rail of American politics, meaning any politician who tried to reduce benefits was committing political suicide.
Today’s conundrum changes that calculation for a simple reason—without reform, the Social Security Old-Age and Survivors Insurance (OASI) trust fund becomes insolvent by 2032 and benefits, under current law, would be cut by about 23% to keep the program solvent. Change is imminent.
The question to answer, as George Mason University economist Jack Salmon posited earlier this year in his column “The Fairest Way to Fix Social Security,” is “who bears the cost of adjustment? Do we choose deliberate reform or chaotic default, and do we choose to protect the most vulnerable or distribute pain equally across rich and poor alike?”
As those questions suggest, the problems to resolve are more political than mathematical. The math is relatively straight-forward.
As Salmon reports, “Social Security was designed for a different demographic reality. In 1955, nearly 9 workers supported every retired beneficiary. Today, that ratio has collapsed to 2.7 workers per beneficiary. By 2035, it will fall to 2.3 and continue declining thereafter.” That’s a direct reflection of an aging demographic, longer lifespans and lower birth rates.
If Congress were to keep the current benefit structure and borrowed money to cover costs, the Congressional Budget Office projects Social Security’s primary shortfall would exceed $25 trillion in 30 years, generating an additional $16 trillion in interest costs. But that’s not the only budget shortfall Congress has to reconcile. In the same 30-year timespan, Medicare is projected to show a $58 trillion shortfall (interest included). That’s a whopping $100 trillion shortfall in America’s two programs supporting the nation’s retirees.
WHAT TO DO?
Four options are obvious, the first three with significant downsides:
• Benefit cuts touch that third rail of politics, and neither political party wants to suggest significant cuts to the 68 million Americans on Social Security, including 54 million retired workers and their dependents. With the mean benefit just under $2,000 per month for retirees, cutting that by 23% is a nonstarter.
• Raising taxes has more appeal, though solidly opposed by Republicans. Suggestions have focused on gradually raising the income cap from $184,500 to $250,000 or even $350,000 and some progressives have proposed eliminating the cap all-together. Very slight increases in FICA taxes from the current 6.2% to 6.5% or higher phased in over several years is also a way to bring finances into balance. The advantage of the latter is that it spreads the burden throughout the middleclass, meaning small increases in the tax can sustain the program for longer periods. While a combination of revenue enhancements is part of most bipartisan proposals, the downside is that tax capacity is also needed to fix the nation’s health care system and shore-up looming Medicare shortfalls.
• Borrowing to fund Social Security shortfalls is the least feasible as demonstrated by the unsustainable high debt the nation would incur, and would violate current law that mandates the trust fund be in fiscal balance.
• A fourth option, as Salmon suggests, is “structural reform with progressive adjustments.” Under that scenario, Salmon suggests several minor reforms, including: raising the full retirement age from 67 to 70 by three months annually, or spread over the next 12 years to better reflect today’s life expectancy; changing the cost-of-living adjustment from a CPI-W to chained CPI-U (technical jargon for a formula for many economists say reflects a higher-cost of living than data actually reflects; the change represents a modest decrease in the annual cost of living adjustments); extend the benefit calculation from the current 35 years to 40 years of average earnings (reflecting longer earning years since the 35-year standard was set in 1977); phasing out nonworking spousal benefits for households in the top income quintile (or highest income); require Social Security Disability Insurance applicants to have worked four of the last six years, rather than five of 10, to tighten the eligibility requirements and insure coverage protects those with genuine work histories. Even with those minor reforms, the biggest change would require what Salmon calls “soft means testing” or limiting maximum Social Security benefits for high-income retirees. The thinking is simple, Salmon writes: “Social Security was established to prevent poverty among retirees, not maximize returns for the affluent.”
Salmon’s proposal is worth reviewing because its broad strokes make it easy to comprehend. In short, he suggests modest benefit adjustments (cuts) with means-testing to limit funds paid to high-income earners. Considering that 38% of Social Security benefits are paid to the wealthiest quintile (top 20%), it’s a reasonable suggestion that helps extend the program’s solvency.
But it doesn’t solve the problem. Salmon’s proposal maintains a pay-as-you-go program that incurs huge government outlays while denying individual retiree’s the opportunity to benefit from higher rates of return that individual retirement accounts invested in the market could provide.
The same short-coming is true of the 2025 Brooking Institute’s proposal titled “Fixing Social Security: Blueprint for a Bipartisan Solution.” This 40-page proposal suggests several revenue enhancements—increasing the payroll tax from 12.4% to 12.6%, raising the taxable wage to 90% of total wage earnings for workers, which in 2024 would have been close to $350,000, and change rules for a pass-through payroll tax. It would also expand some benefits while reducing others, increases participation to make Social Security more universal and in general tries to make the program more progressive. One benefit of studying the Brooking’s proposal is that it provides detailed cost analysis for each added benefit or benefit cuts, and how the proposal would bring Social Security into balance.
Like Salmon’s suggestion, the Brookings report does not suggest any provisions to increase individual retirement accounts. It would continue voluntary retirement savings through IRAs, 401Ks and other tax-free savings accounts, but no additional measures are suggested to boost individual retirement savings as seen with Australia’s and new Zealand’s superannuation accounts.
One of the most progressive proposals to fix Social Security was proposed by Sen. Bernie Sanders, I-Vt., and Sen. Elizabeth Warren, D-Mass., in the Social Security Expansion Act of 2022. The bill was reintroduced in 2025.
The Act called for increasing monthly benefits by $200, increasing the cost-of-living adjustments, increasing the investment income tax (NIIT) from 3.8% to 10% (so, an additional 6.2%) on capital gains, dividends and business income over $250,000, and removes the income cap so high-income earners are taxed on 100% of their income. The Act suggests it would extend Social Security Solvency for 75 years. Criticism from conservative institutes such as the Heritage Foundation say this would increase the top marginal tax rate for wealthy earners in high-tax states to more than 50-55%.
The downside to such high taxes on Social Security is that it reduces the nation’s tax capacity to address other fiscal problems such as Medicare’s looming deficits, making health care more affordable for everyone, and on and on. Moreover, if a large portion of Social Security’s deficit could be erased by creating more robust individual retirement accounts as is done in New Zealand, Australia, Canada, Sweden and many other nations, that’s just common sense.
HOW PRIVATE ACCOUNTS WORK
In last week’s article we reviewed how Australia has used its Superannuation accounts to boost private saving accounts through a defined contribution plan, such as a 401(k) provides, compared to the lower rates of return that defined benefit plans like Social Security provide. The concept is simple: money placed in the stock market yields a historic average of over 7%. Because Social Security payments are fixed amounts based on years of work income, rather than compounding gains through the market, the result is far less earnings over a lifetime of work.
In the first article we previewed the difference in savings for a typical worker’s 40-year career. If a worker started at 25 years old earning $35,000, put their entire 12.4% social security tax into an index fund earning a 7% return and received wage increases of 3% a year, they would retire with about $1.9 million. With that invested in an index fund, the worker would hypothetically enjoy a monthly stipend of about $7,900 monthly. That compares to the average American retiree receiving a monthly benefit of less than $2,000 today through Social Security. Moreover, with an individual retirement account, that investment stays with the family at the time of death. Social Security benefits are extended to a living spouse, but not to any other family member.
The backstop for nations that embrace private retirement accounts is to establish a floor that guarantees retirement income above the poverty line. Australia, for example, has a two-tiered system in which employers pay 12% of the employee’s wages directly into an investment account that is chosen by the employee. It’s a mandatory contribution that stays with the employee throughout their career. Some funds for emergencies or big expenses can be withdrawn, though it’s limited. The second tier in Australia is a minimum base amount for every retiree to ensure those who didn’t save enough in their career will not live in poverty. This base floor is automatically raised to keep the assistance level above the nation’s poverty rate. Most Australians also receive some percentage of their retirement funding from this established floor to supplement their individual retirement accounts, though the amount is means-tested.
Several proposals in America have used a similar approach. The conservative Cato Institute is a top proponent of advancing private retirement accounts, along with suggestions to provide for a base amount to fulfill Social Security’s original purpose: preventing retirees from living in poverty.
Importantly, retirement systems that privatize individual accounts flip the debt burden and create working capital for the nation’s economy. In Australia, individual retirement accounts currently contribute about $4.4 trillion to the nation’s economy, rather than the $270 billion deficit Social Security will place on America’s economy in 2026, a deficit that is projected to grow exponentially for decades.
In addition to individual retirement accounts, nations like Australia and Canada also offer investment savings accounts, which allow tax-free savings up to a certain amount. These accounts can be withdrawn at any time for major or unexpected expenses without penalty.
A U.S. PROPOSAL
In the broadest scope, a model retirement system for the U.S. might incorporate primary individual retirement accounts with mandatory contributions of an amount close to the 12.4% current FICA tax, backed up by a base retirement amount for those who need it. That would be supplemented with universal savings accounts that encourage private savings but don’t penalize citizens for using those funds when needed. Means-testing for Social Security benefits would be imposed on high-income earners. Automatic sustainability measures, like those in most western countries, would be put in place to keep the program’s benefits in balance with revenues. A small part of the 12.4% tax might be temporarily used to create the base amount of benefits for the lowest-income earners.
Inevitably, the devil is in the details. A long-term plan would be required to transition from the current Social Security system to one based on private retirement accounts. Australia started its plan in 1986 and just recently (in 2025) increased its contribution to the current 12%. So, creating a retirement system that relied more heavily on individual retirement accounts would require a gradual transition over a few decades.
In any privatized system, investment funds would be monitored by an independent entity to ensure financial stability yet be varied enough to meet individual preferences. (Some nations have stricter limits on such investment accounts, while others are quite lax.)
The risk of losses in the stock market has been one of the arguments against privatizing any aspect of the nation’s retirement system, but there’s a solid case to be made that not investing in the market is riskier.
While the stock market does have its ups and downs, it’s also true that the market’s average returns have progressed steadily upward over the decades. The S&P 500 has delivered average annual returns of about 10% since its expansion to 500 stocks in 1957. In the past decade, it has averaged 12.9-13.8% and year to date in 2026, it’s up about 14%-14.6%.
The average annual gain adjusted to inflation since 1957 is about 6.5%-6.8%, which is the “real return” and an important aspect of investing in the market. If a person’s retirement savings isn’t staying ahead of inflation, they are losing purchasing power. For example, if a person is making $35,000 today, the equivalent buying power 40 years later at a 3% inflation rate would be $114,171. Just this week, the Social Security Administration announced the Cost of Living Adjustment for Social Security checks would be 3.7% for the upcoming year—recognizing the high cost of inflation in today’s economy. Under the system proposed here for the U.S., that COLA increase would be part of the base amount for those needing assistance and increases annually to try to keep up with inflation.
MISCONCEPTIONS
In addition to the fear of losing retirement income in market downturns, here are a few other misconceptions about investing in the market through retirement accounts:
• You need financial knowledge to invest wisely. Not so. Investing in index funds avoids the need for savvy investment management skills. Rather, a limited number of established funds would be offered to workers. Those funds would show historic yields and the level of risk. Funds that posed too high a risk for a person’s income, or savings, could be restricted to those with a tolerance for higher losses.
• Wall Street would have too much influence. Wrong. Investment funds would not be invested by Wall Street firms but rather created and managed by independent boards not subject to the direct influence of Wall Street or the government.
• Even if the market is down during a particular period, there is no need for someone retiring to “cash in” during a down market. Workers would be able to move their savings into more stable annuities at any time close to retirement and to delay taking their savings until the market revives.
• Some investors may not want to support big business, so various classes of funds could be offered, including some that are broad based and some that are socially responsible.
• Some think Congress is protecting workers by protecting their Social Security benefits by not permitting investment in common stock, but the opposite is true. With a guaranteed floor to protect against poverty, Congress would be denying a large majority of workers the opportunity to earn much higher rates of return in the private market than staying with the status quo. Consider this: the typical pension fund for teachers is invested in the stock market and earns an average of 6.0% to 7.45%. The California State Teachers’ Retirement System posted a 13.9% net return for 2025-26, following an 8.5% net return in 2024-25. Their average rate of return over the past 30 years is 7.8%.
• Others have suggested it would be “unfair” to citizens who have paid into Social Security to be denied any retirement benefits though means-testing, but that misses the point of Social Security’s insurance trust fund. Insurance exists in case a person needs help. Just as we all buy home insurance or automotive insurance, no one feels slighted if they don’t need to collect on their annual investment because they’ve avoided home damage or a vehicular accident. Similarly, if workers are wealthy enough not to need Social Security benefits to live a comfortable retirement, the insurance pool is there to help others who weren’t as fortunate.
In conclusion, the greater risk to Social Security and to the nation’s retirement system is to remain beholden to a pay-as-you-go system in which the prevailing demographics (longer lifespans, declining birth rates, curtailed immigration) lead to greater fiscal imbalances. The smarter move is to flip the narrative to have the retirement investments from millions of Americans working to boost the economy, rather than creating unsustainable deficits. The challenge isn’t making the math work—there are numerous ways to accomplish that goal—rather it’s getting our political system to serve the highest public good.
