http://www.ssa.gov/history/35actinx.html

Finally: a primary source document to resolve our earlier dispute as to whether SS was originally supposed to be pre-funded or pay-as-you-go!

My reading: pre-funded.

It's very clear even from the 1935 language that SS was never a defined-contribution plan that (in Harland's subjunctive phrasing) "kept track of the receipts from each worker, carefully invested them, and apportioned benefits from the revenues" -- i.e. that financed each worker's benefits from just his receipts and the interest on them. The primary thing I see in the 1935 Act suggesting pre-funding is this:

There is hereby authorized to be appropriated to the [Old-Age Reserve] Account for each fiscal year, beginning with the fiscal year ending June 30, 1937, an amount sufficient as an annual premium to provide for the payments required under this title, such amount to be determined on a reserve basis in accordance with accepted actuarial principles, and based upon such tables of mortality as the Secretary of the Treasury shall from time to time adopt, and upon an interest rate of 3 per centum per annum compounded annually.

However, nothing was ever appropriated to the Account beyond the current payroll tax collections: 

Although the 1935 statue did not specify that the annual appropriations to the old-age reserve account be equal to the amount of contributions paid into the system, in practice these appropriations were approximately equivalent to contributions collected, less an allowance for administrative expenses. This practice was based on the approximate correspondence between taxes collected, minus administrative expenses, and the estimated annual premium required for title II benefits computed on a 3-percent reserve basis as specified in the act. In reaching this correspondence, account was taken of uncertainties involved in estimates necessarily based on somewhat arbitrary assumptions and on long-range projections into the future. Since it was necessary under the 1935 act to estimate appropriations in advance of tax collections, a flexible procedure was adopted. Transfers to the old-age reserve account from the appropriations credit were made monthly. These transfers were periodically adjusted to tax collections. [http://www.ssa.gov/history/reports/trust/tf1941.html]

The 1941 Trust Fund report goes on to note that under the 1939 amendments, the Account's successor (the Old-Age and Survivors Insurance Trust Fund) should be appropriated all -- and only -- the receipts of the FICA payroll tax.  Thus SS old-age benefits were from the very beginning funded out of nothing but recent payroll tax receipts, and a person's benefits were NOT limited to his contributions and interest thereon.

So SS was NEVER a defined-contribution savings plan (like a 401K), but rather a "social insurance" program whose pre-fundedness vs. pay-as-you-go-ness depends on whether its original benefit schedule could have been indefinitely sustained by its original contribution schedule. The 1939 amendments radically expanded the benefits and beneficiaries and accelerated the advent of benefits payments, and was without question pay-as-you-go. But what about the 1935 rules? That would depend on an analysis of the the benefit (http://www.ssa.gov/history/1935chart1.html) and contribution (http://www.ssa.gov/history/1935chart2.html) schedules.

A strong hint is that a 1936 SSA pamphlet bragged that the return on your contributions will be "usually more than you can get for yourself by putting away the same amount of money each week in some other way." [http://www.ssa.gov/history/ssn/ssb36.html]. Remember, the first SS beneficiary Ida May Fuller received lifetime benefits of $22K for her lifetime contribution of $50. Even under the 1935 law's minimum benefit, she would have received $4200 in lifetime benefits.  What "pre-funded" or soundly-funded private pension annuity lets you buy in three years before retirement for $50 and reap several thousand dollars in lifetime benefits?

The same pamphlet promised that the 6% combined payroll tax scheduled for 1949 "is the most you will ever pay".  Indeed, the biggest clue that the 1935 Act was pay-as-you-go is the fact that payroll tax rates were scheduled to ramp up through 1949, whereas full benefits were payable starting in 1942. If each age cohort were truly self-funding, then each cohort receiving the same benefit schedule would have had the same contribution schedule. They didn't.

In summary, I stand by every word I wrote about SS in our November thread, with one exception. Ida May Fuller's lifetime contribution was actually $50 and not the widely-reported $25, which omits her employer match.  I don't think anything else I said in that thread about SS has been successfully challenged.

The terminology of "premiums", "benefits", "old age reserve account", "actuarial principles", and "tables of mortality" are obviously drawn from the pre-funding discipline of life insurance.  If the intent were a pay-as-you-go system as you described, the act would have spoken merely of surpluses and deficits.

You expect the welfare state not to obfuscate its intent in the text of its laws?  And here I thought I was the least paranoid person in the LP. :-)

Brian Holtz
2004 Libertarian candidate for Congress, CA14 (Silicon Valley)
http://marketliberal.org