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1 Arthur P. Hall, Forcing a Bad Investment on Retiring Americans 1 (1995)

handle is hein.taxfoundation/srffxz0001 and id is 1 raw text is: TAX i FOUNDATION November 1995 Number 55 Forcing a Bad Investment on Retiring Americans The so-called Social Security trust fund is a fiction. A. Haeworth Robertson, former Chief Actuary for the Social Security Administration, has called it really just a petty cash fund. What is habitually called a trust fund is primari- ly a conduit through which payroll taxes are collected from working Americans and their employers and then immediately distributed to Social Security recipients. This fact is crucial to understanding why Social Security (to date) is so politically popular and why it poses an un- precedented fiscal policy crisis. Figure 1 Real Rate of Return on Social Security for Average-Wage Earning Couple 17.00 D Curren oci__ Security Law D With Payroll 12.00 Tax Increases* 7.00 6 1 * Payroll tax increases that are projected to be necessary to keep Social Security solvent. Source: Tax Foundation. Social Security benefits have never been strictly tied to what a taxpayer contributed in payroll taxes, but to benefit formulas based on wages. As a result, Social Security provid- ed workers retiring before the early 1980s with substantial real rates of return on their employer/employee payroll tax payments, be- cause these people generally received benefits based on their highest lifetime wage levels but faced relatively low lifetime payroll tax rates and, in many instances, paid no payroll taxes for a large fraction of their working life. The early high rates of return on Social Security account, in large measure, for the program's political popularity. These high rates of return began to fade in the early 1980s for two reasons. First, the Social Security system was maturing at that time, meaning that most retirees (and their employers) had paid escalating payroll taxes for most of their working life. Second, pend- ing insolvency of the Social Security system resulted in major reforms in 1983. These re- forms mandated the income taxation of Social Security benefits and an increase in the age at which a taxpayer becomes fully eligible for Social Security benefits - from 65 to 66 in the year 2008, and from 66 to 67 in the year 2026. Since the early 1980s, Social Security has become an increasingly bad deal for almost all Americans. Social Security is again scheduled to go broke - this time in the year 2029. But virtually any reforms designed to repair the solvency of the Social Security program will make Social Security an even worse deal for current workers than it is already. Figure 1 and Table I provide one illustra- tion of this fact. It reports the inflation-adjust- ed rates of return on Social Security (Old Age and Survivors Insurance only), under two By Arthur P. Hall, Ph.D. Senior Economist Tax Foundation 79 74 69 64 59 54 50 45 40 36 31 26 21 16 11 Couple's Age in 1996

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