Social Security has been popular because retirees receive much more in benefits than they and their employers paid in taxes on their wages. However, the real rate of return on Social Security payroll taxes is falling, and will become negative for those retiring in future years.

A recent study found that after compounding Social Security payroll tax payments of both employer and employee with interest:

• A couple age 79, who both earned average wages while employed, currently receive a 16.58 percent rate of return.

• However, an average-wage earning couple who are age 69 receive only a 4.22 percent rate of return.

• An average-wage earning couple age 59 in 1996 who retire in 2002 can expect to receive a -0.36 percent return on their payroll taxes.

Since the benefit formula for Social Security is not exactly tied to the taxes paid, the rate of return turns negative sooner - and is even greater - for higher wage earners and single workers.

• As early as 1998, a high-wage earning couple reaching retirement will receive a negative real rate of return.

• The return is already negative for some couples, such as average- or high-wage earning males with a dependent spouse who reached retirement after 1993.

• Among single males, high-wage earners who retired in 1987 and average-wage earners who retired in 1989 started receiving negative returns.

The high rates of return began to fade in the early 1980s as workers started retiring who had paid escalating payroll taxes for most of their lives, and major changes in 1983 mandated higher tax rates and income taxation of benefits.

Source: Arthur P. Hall, "Forcing a Bad Investment on Retiring Americans," Special Report No. 55, November 1995, Tax Foundation, 1250 H Street, NW, Suite 750, Washington, DC 20005, (202) 783-2760.