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The Predictable SurpriseUnraveling the U.S. Retirement System$
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Sylvester J. Schieber

Print publication date: 2012

Print ISBN-13: 9780199890958

Published to Oxford Scholarship Online: April 2015

DOI: 10.1093/acprof:osobl/9780199890958.001.0001

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Operations under Pay-As-You-Go Financing

Operations under Pay-As-You-Go Financing

(p.69) 7 Operations under Pay-As-You-Go Financing
The Predictable Surprise

Sylvester J. Schieber

Oxford University Press

This chapter explains how pay-as-you-go financing works and the problems that it has caused for Social Security. In general, a pay-as-you-go pension system is funded by payroll taxes. The Social Security Act of 1935 specifies who must pay payroll taxes and the amount of their earnings that is subject to the tax, as well as how retirement benefits will be determined. As Social Security matures, its cost drivers trend upward. In particular, raising benefits had become more complicated. In 1972, an agreement was reached to adjust automatically Social Security benefits. The benefit indexation in the 1972 legislation turned out to be a catastrophe. By the time of the 1980 presidential campaign, Social Security financing was still a significant policy problem that would be inherited by the Reagan administration.

Keywords:   pay-as-you-go financing, Social Security, payroll taxes, Social Security Act, benefit indexation, legislation, retirement benefits

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