The Flaws of the US Social Security System and Possible Alternatives

by Jacob McCartney on 2017-09-07

As a libertarian, I obviously oppose expensive government programs and meddling in the economy in favor of free markets. Social Security is one of those systems heavily praised by both the left and the right as a system that tremendously helps the elderly and the needy. It was created by FDR, a god amongst modern progressives, who is heralded for ending the Great Depression. That is an entirely different topic. I will be making the case that Social Security is a poor system and should be replaced with a free market system.

I will split my argument against Social Security into two parts: Criticisms and Alternatives.


First, Social Security discriminates against the poor and the middle class. Workers are required to pay 1.45% of their wages towards the Social Security fund when wages are below the wage base. As of 2016, the Social Security Wage Base is $118,500. As a result, those with a higher income pay a lower percentage of what they make, and there is no tax on unearned income. According to the Congressional Budget Office, benefits are about three times higher than taxes than it is for those in the top 5th. In a sense, Social Security is a regressive tax.

Survivor benefits actually accelerate the pre-existing issues because they are denied to single individuals, including widows married for fewer than 9 months, divorced widows married fewer than 10 years, and same-sex couples, unless they are legally married.

For unmarried individuals and minorities tend to be less wealthy, the system is less beneficial to them than it is for those who hold more wealth.

The second issue is that Social Security, like all other forms of welfare, is essentially a Ponzi Scheme. While it is a separate tax in a paycheck stub, the money you pay in taxes toward Social Security is not treated as a separate tax; rather, the money you pay is included in regular tax revenue by the IRS. That money is later used to pay for the benefits to those who are retired today. When a payer retires, they will rely on the next generation of workers to pay the taxes that will finance their benefits. This is how a Ponzi Scheme works: it “generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.”

The 2011 annual report by the Social Security Board of Trustees shows that in 2010, 54 million people were receiving benefits, while 157 million people were paying it. Out of those who were receiving said benefits, 44 million were receiving retirement benefits and 10 million were receiving disability benefits. In 2011, there will be 56 million people receiving Social Security benefits and 158 million workers paying for it. In 2010, total income was $781.1 billion and federal expenses were $712.5 billion. That is an increase in federal tax assets of $68.6 billion. Assets in 2010 were $2.6 trillion, an amount that is expected (although without 100% certainty) to be adequate to cover the next 10 years of Social Security benefits. In 2023, total income and interest earned on assets are projected to no longer cover the expenditures required to pay for Social Security. Natural shifts in the demographics put a strain on the system. “[T]he ratio of potential retirees to workers will be 37% — there will be less than three potential income earners for every retiree in the population. … In 2023, total income and interest earned on assets are projected to no longer cover expenditures for Social Security. The trust fund would then be exhausted by 2036 without legislative action.”


There are many alternatives to the system of Social Security. For example, a private pension plan. A pension plan is similar to Social Security but is also different. When one opens a private pension, they pay money into it and it accumulates into reserves. Those reserves are eventually paid back to the individual in full. Essentially, they cannot touch that money until they need it.

Social Security, on the other hand, is not even a fund. One pays into it when they start their first job, and they continue to pay it. Once they reach the cap and once they reach the retirement age, they are paid money each month by the government, though it is not from a fund. It is just cash. The former system works better and is a fairer system because it does not hand out money and does not require new payer to pay for old payers like a Ponzi Scheme does.

Besides that, there is also money saving. It is obvious that pension plans are already sufficient, so even if one did not use a pension plan, there are savings accounts. One must choose not to touch that money, and if they touch it for unnecessary purchases, it is their own fault.

In addition, individuals are presented with a multitude of private investment opportunities, which allow them to not only save their money, but to accumulate interest on the money that they do not touch and then make more of it.

Politicians talk a lot about “privatization,” and a lot of liberals worry this would end up giving bankers control of the money. Privatization, however, would be a different system. When politicians talk about privatizing Social Security, they want to change the current system slightly to the point where it is no longer a Ponzi Scheme but a fund. Workers would continue to be taxed in a similar manner they are now, but instead of those funds paying for the previous generations, it goes to their own personal fund, which cannot be touched until retirement. Privatized Social Security is basically forced savings. This is the system currently practiced by Chile, and it works. While I prefer voluntarism in situations like this, it is a viable alternative to our current system, and I will not leave it out.

I believe I have provided sufficient evidence that a) Social Security is a poor system, and b) It can be replaced by other means to create a far superior system of retirement savings and financial security.


[1] Social Security Administration, “Contribution And Benefit Base,” last modified 2016,….

[2] Congressional Budget Office, “Is Social Security Progressive?” Economic Budget and Issue Brief,….




[6] Brooke Oberwetter, “Social Security: Bad for the Democrats,” last modified June 13, 2005,….

[7] John Wihbey, “2011 annual report by the Social Security Board of Trustees,” last modified June 9, 2011,….

[8] Securities Exchange Commission, “Government-Business Forum on Small Business Capital Formation,”….

[9] Geithner, Timothy, F.; et al., “2011 Annual Report of the Board of Trustees of the Federal and Old Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” US Government.