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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
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
D          Curren oci__
Security Law
D   With Payroll
12.00              Tax Increases*


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
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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