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A Petition to Allow Individuals to Opt Out of Social Security

An explanation of how the Social Security system is harmful to many people, written in defense of their right to practice self-responsibility by providing for their own retirements.

Prepared by Kyle Markley

Introduction

A political battle has been raging over Social Security reform since President Bush's 2005 State of the Union Address, where he declared Social Security reform was a priority in his second term. In that speech he declared, "I will listen to anyone who has a good idea to offer."

This petition will not discuss the various proposals or counter-proposals already being debated in the halls of Congress. This petition is intended to raise awareness of, and gather public support for, an idea that deserves a prominent place in the public debate over Social Security reform — and ultimately, in the halls of Congress.

The idea is that participation in Social Security should be voluntary, not compelled. Specifically, the OASI (retirement) portion of Social Security should be voluntary. Social Security also has a disability insurance component, which is outside the scope of this proposal. Medicare is also outside the scope of this proposal.

Individuals should be free to "opt out" of OASI, paying no OASI taxes and receiving no OASI benefits. To replace retirement benefits, individuals would save money during their working years. To replace survivors benefits, individuals would purchase life insurance.

Numerical Note

The tax rates used in this document are those for an employee working for an employer, not for someone who is self-employed. The self-employed pay both the employee and employer portion of the payroll tax, effectively doubling the rate of taxation. This document is written from the employee's perspective view and largely omits the employer's. To understand the true economic impact, both employee and employer contributions must be considered.

Additionally, this document's convention is to use figures for OASI rather than the more commonly cited figures for OASDI. This is done in emphasis that the Disability Insurance component of Social Security is outside the scope of this proposal.

Introduction to Opt-Out

Precedent

Social Security is not a universal program. As it has changed over the years it has trended toward that direction, but even today there are many people who are not part of the system.

Employees of the federal government were not covered by Social Security until 1984, and people hired before that date were not forced to participate in Social Security.

Employees of state governments are usually, but not always, in the Social Security system. When it was created, there were concerns about the federal government's Constitutional authority to directly tax the states as necessary to collect the employer portion of payroll taxes. Over a dozen states opted out of the Social Security system, and their employees are covered by other public pension plans.

Employees of some municipal governments (most famously, Galveston TX) opted out of Social Security and set up their own systems. This is no longer allowed, but the people in those alternate systems are still outside Social Security.

Almost all non-government employees are forced to participate in Social Security. The only exception allowed is for people who object to Social Security for religious reasons — they may fill out IRS form 4029. The restrictions on this option are unfortunately very strict.

For more information on people who aren't covered by Social Security, see this article.

The goal of this petition is to change the Social Security system to allow anyone to opt out. Participation in Social Security should be voluntary, not compulsory. There are many good reasons why an individual might not want to participate in Social Security. It was a mistake for the government to place religious restrictions on an individual's ability to opt out.

The Usefulness of Separate Accounting

The Social Security system has always had separate accounting from the rest of the federal government. This is a useful feature, and is essential to the viability of individual opt-out.

It is true that the Social Security trust fund does not contain any assets in an economic sense. But as an accounting device, it helps to separate the Social Security system from the rest of the federal government's budget. For opt-out to be effective, Social Security must never be funded with general revenues. Funding with general revenue would amount to taxation of people who are outside the Social Security system in order to pay benefits to people who are inside the Social Security system. Taxation without benefits would be obviously unfair.

Further, it is important that Social Security trust fund bonds earn a market rate of interest. An artificially high interest rate is equivalent to funding Social Security with general revenues (unfair to those outside Social Security), and an artificially low interest rate is equivalent to subsidizing the overall federal government budget (unfair to those inside Social Security).

There are two aspects of the "Social Security crisis" today, and the fact that there are two matters to consider has been responsible for much of the confusion on the subject. One aspect is is that the trust fund is predicted to be empty in approximately 35 years, at which time benefits will be cut severely. The other aspect is that the federal government cannot afford to redeem the trust fund bonds. This problem begins in 2008, when the annual Social Security surplus begins to decline. With respect to the latter aspect only, the interest earned on the trust fund bonds is irrelevant. (For more information on this, see this article that used the 2004 Trustees' Report.)

Disadvantages of Social Security

Issues related to Lifespan

Short Lifespans

Social Security is not appropriate for people who expect to die before being eligible to collect benefits, or before they could collect sufficient benefits to compensate for the premiums they paid. While it is not possible to predict the date of your death (especially due to factors like automobile accidents), some people can rationally expect to have shorter-than-typical lifespans.

Genetics, injury, disease, and lifestyle choices all have significant effects on health and longevity. When a person expects they will not survive long enough to retire and collect Social Security benefits, the system provides them no value. Indeed it harms them, by taxing them all through their life.

A person with a serious expectation of a short lifespan might rationally choose not to save for retirement at all, knowing that they would not live to enjoy it anyway. Instead, they would use that money to better enjoy the lifespan they have. People should be free to do this.

To argue that Social Security still offers survivor's benefits is to miss the point. The injustice is to the person with the short lifespan who is deprived of the things they could have bought with the money that instead went to Social Security. Besides, the person might not have any dependents who could collect survivor's benefits!

The inheritability of private savings is a strong disadvantage of Social Security. Private savings can be given to anyone upon death, but Social Security survivor's benefits are limited to spouse, children, and dependent parents. A person wishing to give to their siblings, more distant relatives, friends, or charities or other organizations, cannot do this with Social Security benefits. Being forced to pay into Social Security makes funds unavailable for any of these sensible purposes upon death. People should be free to do this.

Long Lifespans

Long lifespans are also a challenge for Social Security. This has been an issue since the very beginning of Social Security. The very first person to collect retirement benefits, Ida May Fuller, famously paid total payroll taxes of $24.75 yet received $22,888.92 in benefits. This almost comical imbalance happened because she retired at age 65, yet lived to be 100 years old.

Social Security's financing does not come from general government revenues. It comes specifically from payroll taxes. When Social Security contributions received exceed benefits paid, the trust fund balance grows. When benefits exceed contributions, it shrinks. (The trust fund balance is not allowed to be negative; the system cannot be in debt.)

The windfall paid to people with unusually long lifespans like Ida May Fuller comes at the expense of other people contributing to the system. In particular, it comes from the taxes of people who have short lifespans and die before collecting enough benefits to offset their taxes.

This balancing between people with unusually short and unusually long lifespans has meant that although the Social Security system is grossly unfair to those with short lifespans, the financing of the system as a whole has not been threatened. But what would happen if long lifespans weren't unusual?

The Social Security Administration has statistics about life expectancy relevant to this discussion. The percentage of the population reaching retirement age from adulthood has risen steadily, and so have life expectancies from retirement age. Long lifespans are becoming more common.

In the future, extremely long lifespans will present an overwhelming challenge to Social Security. Longevity researchers such as Dr. Aubrey de Grey view aging as a curable disease that advancements in medical science will soon tackle:

Aubrey de Grey, a gerontologist at the University of Cambridge in England who is seeking a science-based "cure" for aging, thinks people will live well beyond 100 during this century because of medical advances yet to be made.

The first person to hit 150, he believes, is already 50 now. And the first individual to celebrate 1,000 … is just five years younger, he contends. [source]

A key point to realize about life extension is that it would add healthy, productive decades to peoples' lives — not merely decades of frailty. With the ability to work productively for hundreds of years, the very concept of "retirement" needs to be reexamined. Without frailty, there is simply no need to retire, and the raison d'être for Social Security as a retirement system evaporates.

Social Security could not survive this sort of medical advancement. It would be utterly ridiculous for people to pay contributions into the system for a mere fifty years or so, but then reach "retirement age" and collect benefits for hundreds of years. The financing is impossible. The only way to save the system would be to raise the retirement age, but there is no rational basis for picking any new age. If people only die due to accident or disease, lifespans will vary widely. The problem of the short-lived being taken advantage of, and the long-lived reaping a windfall, will only get worse.

Issues related to Incentives

Social Security is popularly believed to compensate for the fact that people do not save enough for their own retirements. Without Social Security, the elderly would be impoverished. This belief overlooks several things.

A Disincentive to Save

The existence of Social Security as a retirement system is factored into peoples' retirement plans. A person planning their retirement who expects (say) $2,000 in monthly expenses, but also expects $1,000 of monthly Social Security benefits, will realize that their pension and savings only need to provide an additional $1,000 each month, not the full $2,000. The expectation of Social Security benefits reduces the amount of private saving any individual will do. If Social Security didn't exist, people would save more. It is a fallacy to claim that people would retire poor without Social Security. Social Security is a disincentive to saving, it creates the very circumstances that people are worried about.

The Ability to Save

A person who opts out of Social Security could finance additional private savings with the money they would no longer pay in Social Security taxes. Opting out of Social Security simultaneously creates the need for additional private savings and provides the funds with which to do it. For example, an individual who earns $30,000 annually over 45 working years at the present OASI rate of 5.3% will pay over $70,000 in contributions over the period. If instead they invested that money and earned only 5%, they would have over $250,000 which (again at 5%) would generate income of slightly over $1,000 each month. (This calculation excludes the employer's share of OASI taxes.)

Increased Indebtedness among the Young

Social Security financially harms the young, and this harm affects their entire lives. This is a different harm than the opportunity cost of not being able to invest one's Social Security contributions. This is a real cost of increased indebtedness. A typical young person with a mortgage, car loan, and moderate credit card balances is paying a lot of interest charges. Particularly on credit cards, the interest rates are very high — much higher than the rate of return a person can expect on Social Security contributions (unless you get an unpredictable, lucky windfall like Ida May Fuller).

It is financially unreasonable, it is harmful, to be forced to contribute to Social Security when you have debts at a higher rate of interest. It would be much better to have the freedom to opt out of Social Security and use those payroll taxes to pay down the 15%-interest credit cards, and after that's done, then save for retirement. Doing this, people would be wealthier when they finally do retire.

As it exists today, Social Security forces young people to pay additional interest on debt, and in fact by reducing their effective incomes it forces them into more debt in the first place. Viewed another way, Social Security is actually a subsidy for the banking industry because it increases the demand for loans. The banking industry does not deserve this subsidy, and young people do not deserve to be held in debt.

Look at your annual Social Security Statement. How much have you and your employer paid into the Social Security system? How does this amount compare to your credit card debts or other debts?

Means-Testing would Encourage Irresponsibility

If Social Security ever becomes means-tested as a way to reduce costs, this would be a powerful incentive for people to reduce their private retirement savings. It would be a direct swipe against personal responsibility. Why should a person save money today if the government will use that as an excuse to reduce their retirement benefits? No! In that situation, saving means not enjoying that money today and not enjoying that money tomorrow, either! They'll need that saved money just to make up for their reduced benefits; it will not give them any higher quality of life in retirement. Saving would mean throwing money away and never enjoying it. Instead, people will spend now and purposely under-save for retirement, simply to qualify for benefits. A means test is simply a subsidy for irresponsibility. Irresponsibility should not be subsidized.

Many young people do not believe that Social Security will provide current-day levels of benefits by the time they retire, and are consequently saving at higher rates to compensate. It would be grossly unfair for any system of means testing to turn this fear into a reality — to make those who are worried it won't be there disqualified for benefits if it is still there.

A Disincentive to Work

Social Security is an incentive for people to retire instead of continuing to work. This is because Social Security benefits are taxable if your income during retirement exceeds a certain threshold. These taxes reduce the effective wage rate a person would earn by working, and therefore are a disincentive to work.

It is a clear loss for a person who is willing and able to continue being a productive member of society, to retire and stop working due to tax incentives.

A person who opts out of Social Security will face no such disincentive to work.

Issues related to Planning

The Social Security system is not responsive to an individual's circumstances. It is a one-size-fits-all program that forces conformity and homogeneity. The system is not even appropriate for some hypothetical average person; it is wrong for everyone.

The Information Problem in Contributions

Under the Social Security system, contributions are completely homogeneous. Wages (up to a limit) are taxed at a fixed percentage. This taxation is easy to understand. It's also easy to understand why it's inappropriate.

As mentioned earlier in the section on indebtedness, it is financially irresponsible to pay high rates of interest on debt while earning lower rates of gains on investments. That is one aspect of a larger principle: the appropriateness of saving varies based on individual circumstances. By forcing everyone into the same pattern of saving, Social Security is guaranteed to be less-than-optimal. Individuals should have the opportunity to opt out of the system and build a better future for themselves.

Does it really make sense for people to save for retirement in the same way throughout their working years? From the earlier example, of course not: they will pay too much in interest costs. It would be better to begin saving only when the rate of interest on saving exceeds the rate of interest on debt. The natural pattern would be for peoples' savings to adjust based on their changing priorities. Instead of saving a fixed percentage of their income over their lifetime, people might instead prefer to save a low percentage of their income while they are young and a high percentage of their income when they are older.

The principle is perhaps easiest to understand by thinking about age. To a young person, retirement is very distant. They have other, more immediate priorities. Paying for a vehicle. Paying for a home. Paying for children, and for their eventual college education. Children are a major factor influencing the priority of many decisions. A person with many children, for example, is likely to be less able to afford saving for retirement while they are young. And this may be perfectly fine, on the expectation that the children would help the parents in their retirement.

Beyond considerations of interest rates and the timing of savings is the fact that people value retirement differently. Some will want to maintain the same standard of living in retirement that they enjoyed will working; these people will need to save a lot. Others may look forward to retirement as a time to relax and to pursue a simpler lifestyle. These people will need to save less. Some people are very present-oriented and want to enjoy life today and don't care very much about the quality of their retirement. These people will save little. (And who are we to tell them they're wrong?) There are also people who plan not to retire, who enjoy work and do not plan to stop until they are physically unable to continue. These people will save almost nothing for retirement, and that may be appropriate for them!

When people have different goals for retirement, their pattern of saving will be different as well. The ability to opt out of Social Security would provide people with the maximum flexibility to plan their own retirements according to their own preferences.

It could be argued that Social Security does not completely replace private savings and therefore people do still have flexibility in how much they save in addition to their Social Security contributions. This is true, but misses the larger point. Social Security should be viewed as a type of (forced) investment vehicle. Investing is not a simple matter — investors must allocate among investment classes, pick investments within them, evaluate investment risks, etc. On an investment model, Social Security is one type of investment among many. The task of deciding how much to invest in any particular thing should apply to Social Security just as it applies to all over investment vehicles. For the same reasons that different people have different proportions of their portfolio allocated to bonds, for example, different people should also have different proportions of their portfolio allocated to Social Security. Here again, the homogeneous nature of Social Security taxation ensures a less-than-optimal balance in an individual's total portfolio. It would prevent, for example, an entrepreneur to save for retirement by investing 100% of their assets in their business on the plan to sell it to fund retirement. That level of risk might not be appropriate for most people, but why forbid it to those for whom it is appropriate?

The overall message is that individuals are in the best position to plan for their own retirements. Only they understand their expectations for retirement, the priority of other financial demands along the course of their lives, and the level of risk they believe is appropriate. The government should not forbid people from making what they believe are the best decisions in these areas. Individuals should be allowed to opt out of Social Security if they believe it is getting in their way.

The Information Problem in Benefits

The structuring of Social Security retirement benefits are also inappropriate for many people. The structure of benefits — a monthly benefit based on your pre-retirement wages — may be appropriate for the same sort of people who would buy an annuity with private savings. Other people may prefer to do something different, and should be allowed to.

For example, a person's dream retirement may be to "go out with a bang" and do all the exciting things (like traveling the world) that they weren't able to do while working. They would front-load their retirements, enjoying life to its fullest while their health lasts, and then settling in for a peaceful and low-budget lifestyle when their health begins to fade. This sort of retirement is not well-served by an annuity structure due to the large up-front spending. Taking out a loan and paying it off with monthly benefits isn't right either — that would be needlessly increasing indebtedness among the elderly, costing them interest. Opting out of Social Security would let them have flexible access to their money.

The earlier arguments about short lifespans become more forceful for people who have reached retirement age. They know their current health and are better able to predict how long they will live. Any person who expects to die before their Social Security benefits offset the contributions they paid over their working years would wish they had all their money available immediately. That would give them the ability to "go out with a bang", or to pay for expensive medical procedures, or simply to pass it on to their heirs. (As described earlier, survivor's benefits can only go to immediate family members.)

It is important to underscore the plight of people who are in poor health and face large medical bills early in their retirement. They are less able to afford medical care to keep them comfortable in their final years because Social Security only provides monthly benefits — they have no way to "cash out" their contributions in a lump sum. This is a grave injustice, if you'll pardon the pun.

The annuity-like structure of Social Security benefits is wrong for a lot of people. It could increase their debt, make them less able to afford medical treatment, and/or prevent them from providing for their heirs.

Social Security is Inflexible

A person's financial plan should address the particular circumstances of their life. Social Security does not do this. Social Security treats everyone the same way without regard for how appropriate it is. The great advantage of private savings over Social Security is liquidity. With private savings, a person has choices — with Social Security, they have none. There is no flexibility at all.

The possibility of making bad decisions comes along inseparably with flexibility. Much of Social Security's attractiveness is that it forces people to make the "right" decisions — but this is hubris. As this petition demonstrates, Social Security is the wrong decision for many people.

If Social Security was optional, of course many people would choose to remain in the system. They would be "protected" from making "wrong" decisions. Those who opt out would be able to pursue something they believe is better. People should have the right to make this decision for themselves. They have more information about their circumstances than anyone else — they are in the best position to judge.

Issues related to Morality

Moral Objection to Social Security

Social Security already allows people to opt out for religious reasons by filling out IRS form 4029. This is too restrictive. Why are religious objections allowed, rather than the more general category of moral objections?

The existing religious exception is curious in another way. To be eligible, you must be "conscientiously opposed to accepting benefits of any private or public insurance that makes payments in the event of death, disability, old age, or retirement; makes payments for the costs of medical care; or provides services for medical care (including social security and Medicare benefits)." The moral religious objection must be specifically based on opposition to insurance, not to any other aspect of the system.

A strong moral objection to socialism, for example, should also be sufficient reason to opt out of the Social Security system. So should a strong belief in the importance of individual property rights. (You have no property rights to your Social Security benefits, as explained in a later section.)

It is morally repugnant to force Social Security on the basis that they aren't qualified to plan their own retirement. It is their right to do so.

Another argument is that the private sector already offers things similar to Social Security benefits in the form of annuities and life insurance products. The government's Social Security system is crowding out private businesses in these areas. (This particular argument goes beyond an advocacy of individual opt-out.) Backed by the force of law, Social Security has created an unequal and unfair competitive environment for businesses. This penalizes businesses who have done nothing wrong.

Forced Savings is Wrong

Social Security is, charitably interpreted, a system of forced savings. People are forced to save — "for their own good" — for their retirement. In addition to the practical arguments already made about the individual best knowing how much and what kind of saving to do, forced savings can be rejected outright on moral grounds.

An individual's property is theirs to do with as they see fit, so long as they do not infringe on the rights of others. If a person chooses not to save, or not to save "enough" (by whose standard?), they are within their rights to do so. People have the right to do things that others consider stupid. Others may properly give them advice and education about the value of saving, but forcing someone to save is a violation of their rights and must not be allowed.

Government should protect individuals' rights to choose how to spend their own money. For the government to institutionalize forced theft savings is a gross inversion of its purpose. Instead of protecting property rights, government is violating them with programs like Social Security.

The choice to opt out of Social Security removes the "forced" from savings, creating a morally better system.

The Young are Politically Disadvantaged

The generational difference between Social Security contributors and beneficiaries creates a serious political imbalance. People who are already collecting benefits, or are near to collecting benefits, want to see their benefits secured and even raised. After all, they aren't footing the bill — the next generation is. It's somebody else's problem, and nothing is too good when somebody else is paying for it.

The young are aware of this, and many deeply resent it. They do not want to pass the burden on to the next generation. This feeling of guilt erodes as people age, replaced with the rationalization that since they've paid into the system, they're entitled to benefits, period.

After you've worked for even a few years, the rationalization becomes very powerful. The retired and the middle-aged together can easily out-vote the young who are still bothered by the moral problem of passing on their bill to the next generation. The political disadvantage is especially true because the people with the most to lose from Social Security — children and the unborn — cannot vote.

The ability to opt out of Social Security will give the young Exit. They cannot effectively use Voice.

Issues related to Taxation

A History and Future of Tax Increases

The Social Security program has a long history of tax increases, and taxes will continue to increase in the future. In its history, the OASI component of payroll taxes (PDF) has increased twenty times and has decreased only six times.

Historical Payroll (Social Security and Medicare) Tax Rates

The historic trend toward rising taxes is primarily necessitated by the changing ratio between contributors (workers paying into the system) and beneficiaries (retirees collecting from the system). This ratio has fallen steadily, and as the "baby boom" generation retires it will reach new lows. Tax increases will be required to maintain the current level of benefits. This graph uses the Trustees' data to show how the burden of paying for OASI will fall on a smaller number of people in the future.

OASI Contributors vs. Beneficiaries Ratio

In addition to the rising marginal tax rate, there has been another less visible form of tax increase. OASI taxes are paid on wages only on a portion of income. The "cap" on income subject to this tax has risen over time.

OASI Wage Cap, 2005 and Nominal Dollars

When Social Security began, only the first $3000 of income was subject to tax. In 2005, the first $90,000 of income is taxed. On an inflation-adjusted (Jan.-Jan. CPI) basis, the wage cap has more than doubled over the lifetime of the Social Security program.

Together, rising tax rates and rising wage caps have dramatically increased the tax burden of the Social Security system.

Maximum OASI Tax, 2005 and Nominal Dollars

For high-income individuals earning more than the wage cap, the amount of OASI tax paid on an inflation-adjusted basis today is almost twelve times what it was when Social Security was introduced!

This strong trend of tax increases illustrates how Social Security has grown over time. As the financial impact of the program grows, the financial reasons to support individual opt-out grow in importance. What may merely be an inconvenience at a 1% tax rate becomes five times the burden at a 5% tax rate. The tax increase has been even greater for those with moderate to high incomes who have been affected by the rising wage cap.

As the ratio of contributors to beneficiaries continues to fall, pressure for additional tax increases will be tremendous.

A History of Crises

The present-day political fighting Social Security being in a "crisis" is not new. It has happened before. More than once.

In the 1970s it became clear the system was seriously underfunded, and the 1977 Social Security Amendments were passed to repair the system. According to President Carter, the OASI trust fund would have been exhausted in 1983.

In the early 1980s it again became clear that the Social Security system was in serious trouble. The Greenspan Commission's report is available online. The 1983 Social Security Amendments accelerated tax increases, made Social Security benefits taxable as income, and increased the full retirement age.

The present-day crisis is the result of the inadequacy of the 1983 reforms. According to the 2005 Social Security Trustees Report, the OASI trust fund will be exhausted in 2043 (Table II.D1). Once exhausted, contributions would only be able to pay about three quarters of scheduled benefits. Full retirement age is 67 for those who will be retiring in 2043, meaning individuals under 30 years of age (born in 1976 or later) will never receive full benefits. People in their early 30s will receive full benefits for only a few years.

Young people are facing a system that will tax them fully, for their entire working lives, yet only pay three quarters of benefits when they retire. This is manifestly unfair.

Even if the present-day crisis is solved, it is merely wishful thinking to believe that there won't be another crisis in a few years. History has proven Social Security to be crisis-prone. If politicians claim they've made a permanent fix, remember that they claimed the same in 1983, and they were wrong! And they claimed the same in 1977, and they were wrong!

The most important thing, of course, is that without this legislation, the social security reserve funds would have begun to be bankrupt in just a year or two, by 1979. Now this legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound.
— President Carter, 12/20/1977

Guaranteed Benefits … Aren't!

Many people defend Social Security on the basis that it provides "guaranteed benefits" — but this is simply untrue. When the Social Security Act was passed, it included this provision, §1104, where "chapter" refers to the entirety of the Social Security Act:

The right to alter, amend, or repeal any provision of this chapter is hereby reserved to the Congress.

Today this can be found in 42USC§1304. The interested can browse all of Social Security law online; it's Title 42, Chapter 7.

The ability of Congress to deny benefits was the subject of a Supreme Court ruling in 1960, Flemming v. Nestor. The Court ruled that individuals do not have an "accrued property right" to Social Security benefits, and that Congress can reduce or eliminate benefits, as happened to Mr. Nestor.

Social Security benefits are not secure. They are not guaranteed. Indeed, as explained in the previous section, they're scheduled to be cut!

The truth — uncomfortable perhaps, but true — is that there is a considerable political risk in Social Security. It doesn't matter whether you trust your Congressmen today. It's not about them. It's about the next ten Congressmen who will serve after them! It is impossible to predict who these people will be or whether they will be deserving of your trust. (If they're anything like the previous ten, who brought about the crises and the tax increases, they deserve your distrust.)

Outside the Social Security system, investors must be concerned with market risk. Inside the system, people must be concerned with political risk. It is willful evasion to pretend that market risk exists but that political risk does not. People ought to have the right to choose, on their own judgment, which risk they prefer to subject their retirement savings to.

Summary

The preceding sixteen sections provide a wide variety of reasons why a person might object to Social Security, preferring to opt out and be responsible for their own retirement.

  1. Social Security is unfair to people with short lifespans.
  2. Social Security cannot adjust to significantly lengthening lifespans.
  3. Social Security is a disincentive to save.
  4. Social Security reduces peoples' ability to save.
  5. Social Security increases indebtedness among the young.
  6. Social Security means-testing is a bad reform option.
  7. Social Security is a disincentive to work past retirement age.
  8. Social Security contributions do not regard individuals' circumstances.
  9. Social Security benefits do not regard individuals' circumstances.
  10. Social Security is inflexible and illiquid.
  11. Social Security forces people into a system they may believe is immoral.
  12. Social Security is a system of forced savings.
  13. Social Security politically disadvantages the young.
  14. Social Security has a well-established history of tax increases.
  15. Social Security has a well-established history of funding crises.
  16. Social Security's "guaranteed benefits" are not guaranteed at all.

Each of these reasons could independently be sufficient to permit individuals to opt out of the Social Security system. Together, they are an overwhelming case against the compulsory nature of Social Security.

Details of Individual Opt-Out

Areas to Consider

Eligibility

Social Security should be a voluntary program. Every individual should have the right to opt out, without any restrictions on eligibility and without any requirement to justify their decision.

Permanence

Would the decision to opt out of Social Security be permanent and irrevocable?

The simplest answer would be "yes," but it would be possible to create a system with the option to opt back in. There is precedent for this — the Social Security allows ministerial earnings to be excluded from Social Security by filing form 4361, and for a time allowed this decision to be reversed by filing form 2031.

Allowing individuals to opt out of Social Security is the goal. The opportunity to opt back in at a later date would be a welcome feature, but not a necessity.

Reimbursement

Would individuals who opt out be reimbursed for past Social Security contributions?

The simplest answer would be "no," individuals who opt out would permanently forfeit all past OASI contributions. Many people (myself included) experience the desire to opt out of Social Security with great intensity and would accept the loss of all past contributions in exchange for the opportunity to opt out of the system.

Some form of reimbursement would be more fair. If genuine concern for the plight of the elderly is the reason Social Security exists, it would not be right to leave people to fend for themselves after having taken many thousands of dollars from them. Reimbursement would probably be easiest to implement in the form of direct payments or tax credits, and are likely to be spread out over a few years rather than provided as a lump sum.

Reimbursement must be funded from the Social Security trust fund. This is because reimbursement is a kind of reversal of Social Security contributions. (Review the section on The Usefulness of Separate Accounting for more reasons.) It is important to realize that this would not worsen the financial position of the Social Security system. The trust fund would shrink due to reimbursement, but so would the future liabilities of the Social Security system, because that individual would not collect benefits in the future.

Reimbursement would be fairest if it was paid with interest, rather than principal only. It would be reasonable to use the interest rates of marketable long-term U.S. government debt for this purpose. The Social Security system has detailed information of how much each person contributed during each year, and records of interest rates are also available, so the Social Security system could apply the appropriate rate of interest as each year's (varying) contributions are compounded. Thus, contributions would be reimbursed to the individual who opts out as if the contributions had been invested in long-term U.S. government debt.

What Happens to Contributions?

The employee portion of OASI taxes would no longer be paid. The individual who opts out of Social Security would keep that money and could use it for any purpose.

The employer portion of OASI taxes would no longer be paid. That money would be paid as wages to the individual who opts out of Social Security who could use it for any purpose. This money must be income tax deductible in order to give equal treatment to people who are self-employed and people who are employed by others. (More information is available on the self-employment tax from the IRS.)

What Happens to Benefits?

A person who opts out of the Social Security retirement program would not be eligible for retirement benefits. They would rely instead on their private savings.

Alternately, if individuals who opt out receive no reimbursement for past contributions, they could be given a pro-rated benefit to reflect the amount of time they did contribute to the system. This would represent a less-than-complete form of opt out, but has the advantage of being basically fair while avoiding the budgeting problem of paying reimbursements.

Three Proposals

I would be happy to see any of the following three options become law.

The Minimalist Plan

The decision to opt out of the OASI portion of Social Security is permanent and irrevocable. All past contributions into the system are forfeit and no reimbursement will be paid. The person who opts out is completely ineligible for benefits.

The Fair Plan

The decision to opt out of the OASI portion of Social Security is permanent and irrevocable. All past contributions into the system are gradually reimbursed, with interest, in the form of tax credits. The person who opts out is completely ineligible for benefits. If they die before fully reimbursed, their heirs are eligible to receive the remainder of the reimbursement.

The Safe Plan

The decision to opt out of the OASI portion of Social Security is revocable. People may decide to opt in or opt out each year. No reimbursement is paid, but all contributions (past and future) are figured into a scheme of pro-rated benefits.

Follow-Up

UPDATE 2005-08-22 03:04:10 UTC: I've blogged on the potential popularity of opt-out, and on its potential fiscal impact.

What You Can Do

Do you think individuals should be allowed to opt out of Social Security, and would like to know how to help? There are several things you can do.

I am interested in improving the quality of this essay. If you have additional reasons why individuals should be allowed to opt out, please write me. I am also interested in hearing counterarguments in order to address popular ones within this petition.

If you are a blogger, you can help by linking to this essay and by writing about Social Security opt-out on your own blog. Links help to make this essay more prominent in search engines. The traffic from your blog and from search engines will both build more public awareness of opt-out.

Spread the word! Talk to your friends about it, in person or in e-mail. A short "you should read this" e-mail with a link to this petition would be great.

Write to your congressmen. I will send this essay to mine.

Attend political events where you might be able to bring up this subject. This is not as difficult or intimidating as it might sound. I have personally been able to bring up the topic of individual opt-out with current Treasury Secretary John Snow, former MN Rep. Tim Penny, and current OR Rep. David Wu. (And be sure to tell me your stories of how it goes — I'll be very interested!)

Thank you for your time and consideration of this important matter.

Tiny Island