Social Security is the bedrock of the American retirement system. Although it was never intended to fully cover the expenses of retirees, many Americans unfortunately find themselves in this situation. But with an average monthly retirement payout of just $1,980.86 as of February 2025, according to the Social Security Administration, the idea of privatizing Social Security has reared its head once again.
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Privatization refers to diverting some or all of workers’ Social Security taxes into individual investment accounts instead of the Social Security Trust Fund. But while the concept is fairly straightforward, the ramifications can be huge.
Here’s a deeper look at what privatization really means, how it might work and how it could potentially affect retirees.
Social Security works by collecting taxes from workers and using that money to pay the promised benefits to retirees. Any excess amounts collected go into the Social Security Trust Fund, where they are invested in Treasury securities.
However, currently, the taxes collected from the workforce are not enough to fund the benefits due to retirees, so the Social Security Trust Fund is actually being depleted.
Under privatization, the entire process would change. Rather than having worker taxes go into a fund to pay the benefits of current retirees, money would instead go into private, individual accounts. These accounts would function something like an IRA, in that each worker would have control over the contributions to and investments in their individual accounts.
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One of the primary benefits touted by those endorsing privatization is the potential for higher returns.
Theoretically, allowing investors to choose from a wider range of investments, like stocks, bonds, mutual funds, ETFs and others, would allow investors to generate higher returns. Rather than relying on worker contributions and the returns of Treasury securities, investors could be more aggressive and earn stock-like returns over the long run if they so desired.
Another suggested benefit of privatization is that worker savings rates may actually increase. Social Security taxes are a mandatory fact of life for workers, and they don’t even go to fund future benefits for those who pay them. Rather, they are used to pay the benefits of those who are already retired.
