Download Special Report No. 55
Special Report No. 55
Executive Summary 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 primarily 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 unprecedented fiscal policy crisis.
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 provided workers retiring before the early 1980s with substantial real rates of return on their employer/employee payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. payments, because these people generally received benefits based on their highest lifetime wage levels but faced relatively low lifetime payroll taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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.
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