MW Could privatizing Social Security enrich your retirement? This country shows how.

By Paul Brandus

Sweden's partial privatization - 2.5% of wages going to stocks - seems a good model for the U.S.

There is no federal program that is more important to the financial security of Americans than Social Security.

In his quest to overhaul the federal government, President Donald Trump and his reformers, led by a chainsaw-wielding Elon Musk, have collided head on with numerous sacred cows - including the biggest of all, Social Security. Defenders of the venerable program - which has faithfully kept its obligations to generations of Americans since President Franklin D. Roosevelt signed it into law 90 years ago - are alarmed.

But even they admit that Social Security is in trouble. Here's why: Because for several years now, more money is being paid out to beneficiaries than is being taken in through payroll taxes. That means Social Security's vaunted Trust Fund could run dry by 2033 - just eight years from now.

What happens then? Benefits would have to be cut to match what's coming in through taxes. That cut is currently projected to be a painful 21%. This ominous forecast has been issued by the Social Security Administration itself for years, by both Republican- and Democrat- appointed officials.

Now consider some sobering data on just how heavily - if not utterly - dependent tens of millions of Americans are on Social Security to begin with:

-- Among Social Security beneficiaries aged 65 and older, 39% of men and 44% of women receive 50% or more of their income from Social Security.

-- Among Social Security beneficiaries aged 65 and older, 12% of men and 15% of women rely on Social Security for 90% or more of their income.

There is no federal program that is more important to the financial security of Americans than Social Security. It is truly a lifeline for tens of millions. Sooner or later, it will affect every American in every state, every city, every town - and every congressional district. For these reasons it has long been branded as the "third rail" of politics - meaning that any lawmaker who touches it will get zapped.

And yet those massive cuts loom, unless politicians face facts.

Lifting the 'earnings cap,' as it's called, could shore up Social Security's finances for decades to come.

What to do? The options are well known. This year, the first $176,100 of worker wages are subject to Social Security taxes, a number that rises with inflation annually. Which means mega-billionaires like Musk don't pay a nickel beyond the first $176K in earnings. Lifting the "earnings cap," as it's called, could shore up Social Security's finances for decades to come.

But that's a tax hike. Republicans won't go for it.

What about gradually raising the eligibility age to begin receiving benefits? It's currently 62.

But that's a de facto benefit cut. Democrats won't go for it.

This mutual stubbornness helps explain why there hasn't been meaningful Social Security reform since 1983, when two political opposites - President Ronald Reagan (a Republican) and House Speaker Tip O'Neill (a Democrat) - compromised, by raising both taxes and the full retirement age. Each did something they had first opposed.

Perhaps something similar could happen now even in this harshly hyper-partisan environment. But could there be another way? A way that could possibly avoid both tax hikes and/or higher eligibility ages? What about partially - partially - privatizing Social Security?

Yes, this is a Republican idea. "Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account," former President George W. Bush said in his 2004 State of the Union address. "We should make the Social Security system a source of ownership for the American people."

That was 21 years ago - Jan. 20, 2004 to be exact. The S&P 500 SPX that day closed at 1,138. Currently the benchmark stock index stands near 5,600. That's after the horrific 2008 meltdown, the 2010 "flash crash," the pandemic meltdown, and the current downdraft, fueled by Trump's tariff fears. Would the cash-strapped retirees I mentioned above be in better shape today, if they had had a bit more exposure to that runup?

But before dismissing the idea of partial privatization on mere partisan grounds, why not look to others who have gone this route? How has it fared for them?

The Swedish solution

Three decades ago, Sweden faced the same problem America does now: declining birth rates, longer life expectancies and a pay-as-you-go system that couldn't make ends meet. Centrist politicians on both left and right agreed (imagine that) that something had to be done.

What does Sweden do now? Instead of putting 100% of payroll taxes into its social insurance system - an equivalent of America's Social Security Trust Fund - the government withholds a portion equal to about 2.5% of a participant's wages and deposits it into individual pension accounts. Workers can invest their own money in up to five different funds offered by independent fund managers. What if you don't want to choose, or aren't sure what's best for you? There's another fund that automatically does it for you, and you can modify it anytime.

Has this borne fruit? Sweden's stock benchmark - the OMX Stockholm 30 Index XX:OMXS30 - has largely mirrored our S&P 500 SPX over the past quarter-century, so you be the judge. But in retrospect, Sweden's partial privatization - 2.5% of wages going into equities - today seems like a good idea. Of course, the classic warning holds that past performance does not necessarily equate to future results.

Naysayers might point out, not unreasonably, that workers who put, say 2.5% of payroll taxes into equities like Sweden does, could see those funds wiped out during a crash. But saving for retirement is a decades-long proposition. History has shown that the benefits of long-term compounding are considerable, and could outweigh even a nasty bear market like the epic financial-crisis meltdown that cut the S&P 500 in half.

Based on history, I'd be willing to bet that a long-term strategy of dollar-cost averaging into the S&P 500 would work out pretty well for any young worker - and again we're only talking about a partial privatization of Social Security. Investment formulas for older workers with shorter time frames and less appetite for long-term risk should be considered. Obviously, U.S. asset-management firms would love to see a gusher of money rolling in for them to manage - and rake in more fees.

But politically, is this even possible in the U.S.? The concept of privatization - even with the adjective "partial" preceding it - is anathema to Democrats. They grilled Trump's pick to lead the Social Security Administration - Frank Bisignano - about this during Senate confirmation hearings last week.

"I've never thought about privatizing," Bisignano told one concerned Democrat, Rhode Island Sen. Sheldon Whitehouse. "It's not a word that anybody has ever talked to me about, and I don't see this institution as anything other than a government agency that gets run for the benefit of the American public."

In his 2000 book 'The America We Deserve,' Trump stated that instead of paying into Social Security, 'You could have made a sounder investment buying lottery tickets.'

Perhaps. But it's also worth noting that Bisignano refused to contradict Musk's repeated assertions that Social Security is a "Ponzi scheme." Is it or isn't it, Nevada Democrat Sen. Catherine Cortez Masto pressed him. Yes or no? Bisignano refused to bite, responding only that Social Security is "I's a promise to pay." What does that even mean?

Incidentally, even though Trump himself now says Social Security won't be cut on his watch, he also described it as a "Ponzi scheme." In his 2000 book "The America We Deserve," Trump stated that instead of paying into Social Security, "You could have made a sounder investment buying lottery tickets."

Oh, really? You know what the chances are of winning Powerball or Mega Millions? About 1 in 300 million. You know what the chances are of getting a Social Security check each month? 100%. Since 1935, it has been a 100% sure thing. What does Trump really think?

More: What will 'DOGE' mean for your Social Security checks? Elon Musk's Fox interview offers more questions than answers.

Also read: Inside one overwhelmed Social Security office: 'It feels like we're being set up to fail,' says a veteran staffer

-Paul Brandus

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 31, 2025 07:35 ET (11:35 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.