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Social Security Should Be a Forced Savings Program Not a Welfare Program

2026-03-27 19:18:11

There is a growing movement to eliminate the wage cap on Social Security taxes while capping benefits. The argument, often from the center-right, is that Social Security is insolvent and that “tough” choices are needed to save it. But this moves the system in exactly the wrong direction.

One of the better features of Social Security is that it has never been purely redistributive. It has also functioned, in part, as a forced-savings program. The Social Security Administration itself emphasizes that benefits depend on earnings history: earn more, retire with more. Why do some people receive large Social Security checks? Because they paid a lot more into the system.

Eliminating the wage cap while capping benefits weakens, and in the limit destroys, that connection. It turns Social Security away from forced saving and toward retirement welfare financed by a broader tax on earnings. That is a bad idea.

The problem is not just that this creates another welfare program. It also worsens marginal incentives. A tax that buys you a claim on future benefits is not the same as a pure tax. Suppose 10 percent of your salary goes into a 401(k). That reduces current consumption, but it is not simply money lost to the state. You receive an asset in return. It is closer to a purchase than to a tax–a reason to work more not a reason to work less.

Social Security is not a personal retirement account, but it does contain that logic. There is a connection between taxes paid and benefits received. To the extent that workers understand that connection, the payroll tax is less distortionary than an ordinary tax of the same size. Part of what workers pay is offset by the expectation of future benefits.

Gut that connection, however, and the tax becomes more distortionary even if total taxes paid and total benefits received stay the same. The averages can remain unchanged while the marginal incentives deteriorate. Once additional taxes no longer generate additional benefits, the system looks much more like a straight tax on work.

A much better reform would move in the opposite direction: strengthen the link between contributions and benefits. Make Social Security more like what many people already think it is—an individual account that accumulates benefits over time. The stronger that link, the lower the effective tax wedge.

This would also improve the politics of the system. A welfare program invites zero-sum conflict: my benefit comes at your expense. A claim-based system is less divisive. It ties benefits more clearly to contributions and makes rising prosperity good for everyone. In that kind of system, we can all become richer—including low-wage immigrants—without treating retirement policy as a fight over who gets to pick whose pocket.

Addendum: James Buchanan first made these points here. John Cochrane gets the economics right, of course.

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Tyler calls Paul Gillingham’s new book, Mexico: A 500-Year History, the single best introduction to the country’s past—and one of the best nonfiction books of 2026. Paul brings both an outsider’s eye and ground-level knowledge to Mexican history, having grown up in Cork — a place he’d argue gave him an instinctive feel for fierce local autonomy and land hunger —earning his doctorate on the Mexican Revolution under Alan Knight at Oxford, and doing his fieldwork in the pueblos of Guerrero.

He and Tyler range across five centuries of Mexican history, from why Mexico held together after independence when every other post-colonial superstate collapsed, to why Yucatán is now one of the safest places on earth, what two leaders from Oaxaca tell us about Mexican politics, how Mexico avoided the military coups that plagued the rest of Latin America, what Cárdenas’s land reform actually achieved versus what it promised, whether the ejido system held Mexico back, why Mexico worried too much about land and not enough about human capital, how Mexico’s fertility rate fell below America’s, why Guerrero has been violent for two centuries, why the new judicial reforms are a disaster, where to find the best food in Mexico and Manhattan, what a cache of illicit Mexican silver sitting on a ship in the English Channel has to do with his next book, and more.

Excerpt:

COWEN: Now, after independence in 1821, why did not the rest of Mexico fragment the way Central America did a few years later, where it splits off from the Mexican empire? What determines the line? What sticks together with Mexico, and what does not?

GILLINGHAM: That’s a very good question because it’s one of the things that really makes Mexico stand out in that period, those histories, is that after independence, the rest of the Americas, you get a series of super-states. You get Gran Colombia, which is most of the Andes, and going across what’s now Venezuela. You get the United Provinces of the Rio Plate. These are huge, very difficult to conceive of super-states, and they fail within a decade. Elsewhere, you look at other post-colonial states, thinking particularly of India, within a couple of years, you’re fragmented and failed. Mexico doesn’t. Mexico actually stands up with the exceptions you put of Central America, which is formally part of it, in fact, but leaves within short order.

It’s one of these questions of what Álvaro Enrigue calls the miracle that Mexico exists. To explain it is a paradox. To make a try at it, I think that there is a common theme in Mexican history, which runs across most of those five centuries, which is a remarkable degree of hands-off government. It’s imposed. Mexico has a lot of mountains. It’s very difficult to rule from any central pole. Savvy governments, or governments with no choice, which are quite often the same thing, are very hands-off. Federalism is built into Mexico’s soul. I think that’s one of the reasons, from early on, Mexico actually out-punches the rest of the Americas in terms of sticking together as a territorial unit.

COWEN: As you know, in the early 19th century, there are rebellions in Yucatán, the Caste Wars, but Yucatán does not split off from Mexico. What keeps that together?

GILLINGHAM: Yucatán has always felt itself to be a different country, effectively, and that runs through to the present. You can see the cultural reasons, obviously, and the Maya and the other great, sophisticated urban culture of the 16th century and before. It makes sense that they should feel themselves very different from the rest of what becomes Mexico. In fact, it comes through in small but revealing ways. Back in the 20th century, people find themselves being asked whether they want a Yucatán beer or a foreign beer, and a foreign beer being anything in Mexico outside Yucatán.

Why doesn’t Yucatán leave? I think that it came extremely close. In fact, there’s a moment in the 1840s when Mexico and Texas form an alliance, and Texas is chartering warships out to Yucatán to try and prevent any naval incursions. Why on earth does Yucatán stay? I think it’s because of the absence of an alternative capital, because Yucatán is profoundly racially divided. It’s one of the few places in Mexico where you could say that really is a fairly stark racial divide. You have a plantocracy, in some ways, like the US South before the Civil War.

You’ve got a relatively small white plantocracy centered in Mérida. They have no interest whatsoever in leading an independent struggle. While the Maya achieve an underestimated level of sophistication as a state, it’s still not at the point where you would get, for more than a couple of years, a really joined-up independence movement spanning all races, all areas, and the entire peninsula.

Recommended, interesting and substantive throughout. In the United States at least, Mexico remains a greatly underdiscussed nation.

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