Socialism is a loaded word in the United States, a country where capitalism is the defining system. One way it comes up is when Americans look at government programs, especially Social Security. To understand what the debate is about, it's necessary to first review some terms.

Under socialism, the government, rather than individuals and businesses, owns and controls major industries and the economy is planned centrally. Consequently, the government is the main provider of goods and services for its constituents. 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 also under government laws and regulations so it's not pure laissez-faire capitalism. At the other end of the spectrum is communism, a more extreme form of socialism (What is the difference between Communism and Socialism? explains more). Some countries – Norway and Sweden for example – have mixed systems with both private ownership for providers of goods and services and socialist-oriented public services for their citizens. 

Though the U.S. is a capitalist country, one of the hallmarks of its 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 retirement benefits and how they might be considered a form of socialism.

Who Runs the System?

The government, not individuals or businesses, runs the Social Security system. It tracks Social Security earnings and benefits, runs the website that lets people check their benefits record, approves or denies retirement benefit applications, collects Social Security taxes and distributes retirement benefits. (For more, see Who Pays Your Social Security Benefits?)

While the government does hire independent contractors – such as Lockheed Martin Corporation, International Business Machines Corp. and Dell – to provide telecommunications, data storage and other services, the government is in full control.

Who Decides How Much to Contribute and When?

Congress decides how much of your paycheck is taxed for Social Security. In 2016, 6.2% of your gross pay goes to Social Security, and your employer kicks in an equal amount; however, If you earn more than $118,500, you don’t have to pay Social Security taxes on any earnings above that amount. If you’re self-employed, you pay the whole 12.4%, though that amount is reduced slightly when you take a tax deduction for the employer portion of that tax.

It's not unreasonable to consider whether, even if you work for someone else, you’re effectively paying the whole 12.4% – “bearing the incidence of the tax,” in economist speak – because if your employer didn’t have to make Social Security payments on your behalf, it could include that money in your paycheck instead. (For more, see Social Security for the Self-Employed.)

In addition, the government  decides when you contribute: If you’re an employee, the taxes are taken out of each paycheck. If you’re self-employed, you pay when you file your annual tax return. (For more, see Understanding the U.S. Tax Withholding System.)

Individuals with private retirement savings accounts have more control over how much and when to contribute than they do with paying Social Security taxes. For example, if you work for a company that offers a 401(k) plan, you can decide what percentage of each paycheck to redirect to that account – although government regulations place restrictions on how much you can contribute. In 2016, the limit on 401(k) contributions is $18,000 unless you are 50 or older; in that case you’re allowed to contribute up to $6,000 more, for a total of $24,000. Furthermore, you can’t contribute to a Roth IRA if your adjusted gross income exceeds $132,000 for singles and $194,000 for married couples filing jointly .

Who Decides What to Pay Out and When?

With a private retirement account like a 401(k) or Roth IRA, you decide when to withdraw money from your account and how much to take out. With some retirement accounts, the IRS will make you pay penalties if you take out money before you reach a certain age or don’t withdraw enough money each year after reaching a certain age. But there’s still much more flexibility than with Social Security retirement benefits.

With Social Security, the government decides how much to give you and when. You can decide when to start receiving benefits, but it has to be some time between age 62 and age 70. Once you start claiming benefits, you’ll get a check for the same amount every month based on your lifetime earnings and your age when you started claiming benefits. However, you may get a cost-of-living adjustment in future years. But you can’t decide to withdraw more money in months when you have higher expenses and less money in months when you have lower expenses, as you could with a Roth IRA.

And if you find yourself terminally ill at 40, you can’t claim retirement benefits early based on what you paid in over the years (you may, however, qualify for Social Security Disability Insurance). By contrast, you can cash out your private retirement accounts at any time without getting anyone’s approval, albeit with a penalty in some cases. Private-sector brokerage firms like Fidelity and Vanguard aren’t going to make you prove that you can’t work if you want to take an early withdrawal from your IRA. (For more, see When Do Social Security Benefits Start and End?)

Can Anyone Opt Out?

Few taxpayers can opt out of paying into the Social Security system. The Amish, Mennonites and other religious groups that conscientiously object can sometimes claim a religious exemption from paying into the system, as long as they also don’t receive or even qualify to receive any benefits from it. If you have received any benefits, you may still qualify for a religious exemption if you repay them. People who renounce their U.S. citizenship can opt out. Some nonresident aliens don’t have to pay into the system, depending on what type of visa they have. Foreign government employees based in the United States and college students who are employed by their university are also exempt. (For more, see Is There Any Way to Opt Out of Paying Social Security?)

What about opting in? Under a public retirement system or a Section 218 agreement, some state and local government employees are covered and don’t pay into Social Security. These employees aren’t allowed to opt in to the program.

With private retirement savings accounts, it’s totally up to you whether to contribute. Even if your employer automatically enrolls you in its 401(k) plan in an attempt to nudge you into contributing, you can un-enroll if you wish.

How Is the Money Managed?

Social Security contributions all go into one collective pot; the funds aren’t held in our individual names. We can’t decide how that money is managed. The system is set up as an intergenerational wealth transfer: The Social Security taxes the government collects from current workers pay for the benefits of current retirees.

Because different generations are different sizes, this structure leads to what could be described as timing problems with paying out benefits. Taxes from the immense Baby Boomer generation comfortably supported the retirement of the relatively small Silent Generation (born between 1925 and 1945, many of those years scarred by Depression and war) and the Greatest Generation (whose members fought in World War II). With more and more Boomers reaching retirement – and the fact that Gen X, the next generation, is much smaller – Social Security’s reserves are estimated to be gone by 2034, and there’s speculation about reduced benefits for future retirees. Gen Y, the Millennials, are an even larger generation than the Boomers, but it's not clear how well their financial contributions will serve to support Boomers and Gen X, and how large the next generations will be.

Depending on when you retire, how much you earned and your marital status, you may see a better or worse return on your “investment” in terms of getting back more than you contributed. Some people would prefer to have the option to save and invest that money themselves because they think they could earn a better return; others think most people would fare worse if Social Security were privatized. (For more, see Social Security Depletion: Is the Fear Justified?)

The Bottom Line

It's interesting to remember that the U.S. got the idea of a social security system from 19th century Germany. That very capitalist monarchy launched an old-age social insurance program in 1889 at the behest of Chancellor Otto von Bismarck, partly to stave off radical socialist ideas being floated at the time. So the original social security was an anti-socialist maneuver by a conservative government.

Nevertheless, because the American government plays such a dominant role in the U.S. Social Security system – deciding how much and when employees and employers pay into the system, and how much individuals receive in benefits when they get them, and preventing almost everyone from opting out – it seems fair to call Social Security benefits a form of socialism. The program requires workers and their employers, along with self-employed individuals, to pay into the system throughout their working years. The government controls the money they contribute and decides when and how much they get back after – and if – they reach retirement age. (For more, see Introduction to Social Security.)

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