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Are Social Security Benefits a Form of Socialism? 

After all, the program is wholly run by the government.

“Socialism” is a loaded word in the United States. In this country, capitalism is the prevailing economic system and is the basis for government. One situation in which the word tends to come up is when Americans look at government programs, especially Social Security.

To understand the debate, let’s first review some terms.

By definition, “socialism” refers to a form of economic production whereby workers co-own and co-produce goods and services and share in the profits. This is opposed to “capitalism,” wherein a business owner owns all of the tools and other means of production and keeps all the profits while paying workers a wage.

Under capitalism, capital goods are owned by private individuals or businesses, and the market controls the economy. In most modern countries, however, this system is subject to federal and state legislation and regulations. So these countries do not practice pure, laissez-faire capitalism.

At the far end of the spectrum is communism, a more extreme form of socialism that, in its purest form, eliminates the concept of private property. For instance, Norway and Sweden have mixed systems: providers of goods and services enjoy private ownership of resources. At the same time, citizens take advantage of social-needs–oriented public services. This is known as “social democracy” or “democratic socialism.”

Though the U.S. is clearly a capitalist country, one of the hallmarks of its government system is Social Security, a government-run benefits program instituted in 1935 in the depths of the Great Depression.

Let’s examine the key components of Social Security benefits — specifically, the extent to which they might be considered a form of socialism.

The United States government, not individuals or businesses, runs the Social Security system. They track your Social Security earnings and benefits. They run the social security website that lets you check on your benefits record and apply online for your benefits. They also collect the Social Security taxes, and they distribute retirement, disability, and other benefits.

The U.S. Congress decides how much of your paycheck is taxed to contribute to the Social Security fund. For example, in 2021, 6.2% of your gross pay goes to Social Security, and your employer typically kicks in an equal amount. However, suppose you earn more than $142,800. In that case, you don’t have to pay Social Security taxes on any additional earnings above that amount. If you’re self-employed, you pay the full 12.4%, though that amount is slightly reduced when you take a tax deduction for the employer portion of that tax.

Individuals with private retirement savings accounts have more control over how much and when to contribute than paying Social Security taxes.

In 2021 the annual limit on 401(k) contributions is $19,500 unless you are 50 or older; in that case, you can contribute up to $6,500 more, for a total of $26,000.

With Social Security, the government decides how much to give you and when. You can decide when to start receiving benefits, but it can’t be until age 62, and you collect the highest benefit at age 70. When you begin to claim your benefits, the check amount is the same for your lifetime. They will occasionally increase with the cost of living adjustments.

According to the 2021 annual report from the Trustees of the Social Security and Medicare Trust Funds, the estimated depletion date is one year earlier than the 2020 report. Also, the report cited that the taxes being paid into Social Security in 2033 will only cover 76% of the scheduled benefits. This can be amended if the government increases the social security tax by 1% a year.

There are other ways as well, all decided by the government.

It’s interesting to remember that the U.S. got a social security system from 19th century Germany. At that time, this monarchy was capitalist; they launched an old-age social insurance program in 1889 at the behest of Chancellor Otto von Bismarck. One of the reasons was to stave off radical socialist ideas being floated at the time. This original social security was actually an anti-socialist maneuver by a conservative government.

The government plays a dominant role in the U.S. Social Security system. They decide how much and when employees and employers pay into the system and how much individuals receive in benefits when they get them, preventing almost everyone from opting out. Is it fair then to say that Social Security is, in effect, a form of democratic socialism? As a financial advisor who works with people in retirement, I feel it is a much-needed form of social insurance or social safety net. But I also feel that wearing a seatbelt where the state governments will ticket you if you fail to do this is a much-needed social safety net. How about you?

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