How Privatizing Social Security Could Impact Retirees
John Csiszar, Go Banking Rates, 4/17/25
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.
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.
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What Is Social Security Privatization?
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.
Potential Benefits
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.
With privatized, individual accounts, workers may be allowed to contribute a greater percentage of their earnings towards their Social Security accounts. Participation might also increase as workers would see the money go directly into their own accounts, instead of being seen as taxes that go right to the government.
Drawbacks
Transitioning from the current system to privatization would be messy at best.
For starters, if Social Security was immediately privatized, it would turn off the flow of funds from current workers that is used to pay benefits for retirees. In short, the only available funding for paying benefits would be the Social Security Trust Fund, which is already being depleted even with current worker contributions.
For a number of years or even decades, the program would have a significant financial shortfall, which would result in either higher deficits or higher taxes, or perhaps both.
Another potential issue is that workers aren’t necessarily adept at investing their own portfolios. Numerous studies have shown that the average investor in a mutual fund, for example, tends to underperform the return of the fund itself.
The most likely reason for this is that investors sell out of funds when the market is down and miss the big gains of the bounceback, only buying back in when shares have gone higher. If investors do this in their own privatized Social Security accounts, they may actually end up losing money — or underperforming Treasury securities — rather than capturing that potentially higher gain.
The Bottom Line
Privatizing Social Security is much more complicated than simply making an announcement and changing the system. Any change would first have to address how to pay retirees, as taxes on current workers would now be going to fund their own privatized accounts.
The idea also raises the fundamental question of whether workers should be in charge of their own Social Security accounts, and if the whole process doesn’t simply amount to a windfall in fees and commissions for financial services firms.
Clearly, there’s a long way to go before such a system is implemented. But it pays to be on top of the chatter, since any changes would have a huge impact on both current workers and retirees.