PensionReforms' summary and comments
In the US, the Old Age and Survivor's Insurance (OASI) is financed by a payroll tax (Social Security 'contributions').  The employer and employee share this but, on the actuarial assumptions used by the Trustees, this will not be enough to cover future payments.

This 2007 report looks at projected OASI benefits (excluding Disability Insurance contributions and benefits) through to 2220 (including the cohort of those born in 2100) and compares the present value of those benefits with the value of contributions that beneficiaries are expected to pay during their working lifetimes.  According to the report, this is done on a ".more comprehensive, more accurate historically and extensive prospectively, and/or conforms more closely to the official Trustees Report projections than analogous estimates in previous analyses."

Whether today's and tomorrow's contributors receive 'fair value' depends on the amounts they will contribute, the benefits they expect to receive, and the chosen discount rate, the last being necessary in order to compare the two financial streams. The report notes that ". the choice of an appropriate risk-adjusted interest rate [i.e., discount rate] to evaluate program outcomes is difficult and controversial."

The results are that, if the discount rate is 1.35% or less, ".even the most distant birth cohorts will receive their money's worth from the OASI program."  But, if ". a risk-adjusted real interest rate of 2 percent or above is deemed appropriate, then no cohort born after about 2015 is projected to receive its money's worth by this measure under either of the balanced budget policies considered."

In fact, however, the true value of money's worth depends on the difference between the discount rate and the rate of growth of the tax base (real wages); the tax base is simply assumed to grow at 1.35% a year.   Because of that:
". lifetime benefits will tend to be greater (less) than lifetime taxes if the risk-adjusted interest rate series used in the calculations is generally less (greater) than the growth rate in the program tax base."

The report then looked at what it calls the "legacy debt" that benefits early cohorts in a PAYG scheme.  Again, the choice of discount rate is crucial:
"As such, the typical practice of using the trust fund or other market interest rate unadjusted for risk in the legacy debt calculation may produce a quantitatively misleading or even qualitatively invalid indication of any "debt" or "burden" imposed by the program on present and future cohorts."

PensionReforms wonders at the utility of these kinds of calculations.  They happen because there are earmarked taxes (Social Security 'contributions') that are paid to the Social Security 'Trust Fund' and that are reviewed regularly by the actuaries to the Fund.  These taxes are different from other taxes in the more a person pays, the greater his or her entitlement. (Payment of more school taxes or road taxes, for example, does not give rise to greater entitlement to use of public schools or roads.)  Apparently, contributors for this reason need assurance that what they will be paying will be a reasonable investment, especially in the face of the now reducing value of Social Security (the State Pension Age is increasing).

The 'Trust Fund' is a notional affair (wholly invested in untradeable government bonds) that notionally sets aside only a portion of the cost of future pensions: most of the costs will be financed on a pay-as-you-basis out of tomorrow's tax receipts ('Social Security contributions').  Given that today's voters cannot force tomorrow's politicians to do anything in particular, future governments might choose to default on these pension promises (in the same way the current government is now), just as they might choose to default on payment of the special government bonds, although with fewer consequences in the financial markets. 

Given the uncertainty of returns on this 'investment', PensionReforms thinks there seems not to be a lot of point in working out whether Social Security contributions are (or will be) 'fair value'.  (File size 543 KB; 104 pp)  371