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Social Security Trust Funds | (Full Guide) To How They Work

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If you know anything about the Social Security program, you have likely heard about the Social Security trust funds. However, most people don’t know exactly what these trust funds are or how they work. When many people think of a trust fund, they think of a large pile of money that can never run out. That’s not quite the case with Social Security. Since Social Security is a pay-as-you-go system, the trust funds work slightly differently. If you pay Social Security taxes and expect to receive Social Security benefits in the future, then keep reading. We will tell you exactly how the Social Security trust funds operate and what changes could be on the horizon.


What Are the Social Security Trust Funds?

Many people wonder how social security is funded, and part of the answer lies in the trust funds. There are two trust funds associated with Social Security, and those are the Old Age and Survivors Insurance trust fund (OASI trust fund) and the Disability Insurance trust fund (DI trust fund). They are collectively referred to as the OASDI trust funds. The trust funds were established by Congress, and the money in these funds is used to pay benefits to Social Security beneficiaries. The Old Age and Survivors Insurance trust fund is used to pay benefits to retired workers and their families, as well as the families of deceased workers. On the other hand, the Disability Insurance trust fund is used to pay benefits to disabled workers and their families.

The two Social Security trust funds provide a way of tracking all payments and disbursements from the Social Security program. As OASDI taxes come into the trust funds, the deposits are tracked. Similarly, all benefit payments from the trust funds are tracked. The Social Security Administration (SSA) has automatic spending authority over the money that comes into the trust funds. This means that they can use that money to pay monthly benefits without any specific action from Congress.

There are also two trust funds that have been established to fund the Medicare program. Those are the Hospital Insurance trust fund and the Supplementary Medical Insurance trust fund. These trust funds are separate from the Social Security trust funds, and the money used to fund these accounts comes from a separate payroll tax.


How Do the Social Security Trust Funds Work?

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Millions of Americans rely on payments from the Social Security trust funds each month, but few really know how the trust funds work. Here is what you need to know. First, the trust funds are managed by the Department of Treasury. While the U.S. Treasury is the ultimate manager of the trust funds, there is a Board of Trustees that provides financial oversight of the funds. This board prepares a trustees report that is presented to Congress each year. The annual Social Security trustees’ report gives Congress details about the financial status of the Social Security program.

Now that you know how the oversight of the funds works, let’s dive deeper into the details. You likely already know that Social Security taxes are withheld from your paycheck, and your employer also pays the same amount of Social Security tax that you do. These taxes are placed into the Social Security trust funds. The money in the trust funds is then used to pay benefits to current beneficiaries. When you pay Social Security income taxes, those taxes do not go into your own private retirement account. Instead, the money is placed into the trust funds and paid as benefits to current Social Security recipients.

The money in the trust funds is also invested, and we will discuss the investment allocations in more detail in the next section. The investments in the trust funds produce interest income, and this additional income helps the federal government cover all of the benefit payments each month. You should know that roughly 99% of the money placed into the trust funds is used for benefit payments. Only about 1% of Social Security taxes are used to cover overhead expenses and program costs.


Investment Allocations In The Social Security Trust Funds

Federal law restricts the types of investments that may be held in the Social Security trust funds. Current law requires that all income in the trust funds must be invested on a daily basis, and the funds must be invested in securities that are guaranteed by the Federal government for both principal and interest. These government securities are considered special issue securities, and they are only available to the trust funds. These securities are not available on the open market. These special issue treasury securities allow the trust funds to redeem them at any time for face value. The interest rate earned on these investments varies, but the rate was roughly 1.3% in 2021.

In the past, it was possible for the trust funds to hold marketable securities. These types of securities could potentially incur a loss if redeemed before their maturity date. This could cause the trust fund balance to decrease as a result of the loss in the investment. To help protect Social Security’s finances, the current law no longer allows the purchase of marketable securities.


How A Social Security Trust Fund Surplus Is Handled

What happens to a Social Security surplus depends on the status of the budget in other government areas. If the rest of the federal government is in excess or has a balanced budget, then the Social Security surplus can be placed into the trust fund reserves. These reserves are in place to help make benefit payments during years in which there is a deficit between the amount of taxes collected and the amount of benefits due.

However, if other government agencies are experiencing a shortfall, the Social Security surplus will help pay for those deficits. The U.S. government always borrows money from itself before borrowing money from others to pay its obligations. If a Social Security surplus is used to help pay for deficits in the general fund, the government will ultimately repay the money into the Social Security trust funds. Since that money is specifically earmarked for the Social Security system, it must be repaid at some point in the future.


Solvency Of The Social Security Program

Many people ask, “When will Social Security run out of money?” There have been rumors of Social Security running out of money for years. Unfortunately, recent annual reports from the trustees have shown a shortfall in the Social Security program. This means that the system is paying more in expenditures each month than it collects in Social Security taxes. The trust fund reserves are being used to cover the difference, but those reserves will eventually run out of money. What happens when the reserves are depleted?

Most experts agree that the solvency of the Social Security program is in trouble. According to most actuary reports, the trust funds only have enough reserves to continue paying benefits at current rates for about 20 more years. Once the reserves are depleted, the Social Security program would only collect enough money each month to pay about 80% of the benefits owed. Several potential fixes to the program have been discussed, and we will discuss those in more detail in the next section. While no one knows for sure what will happen, lawmakers in Washington, D.C., will need to make some changes to keep the program operating.


Potential Social Security Changes

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Several possible changes have been discussed for Social Security, and some changes are more likely than others. We will discuss the most common changes that are made and tell you which ones are most likely to occur.


— Increase In Retirement Age

The retirement age for most people currently is 66 or 67 years old. In fact, Social Security’s full retirement age was recently raised. However, further raising the retirement age could help keep the program solvent for a longer time. Remember that you must wait until full retirement age before you see your full benefits. Starting them early will lead to reduced payments. This change is not very likely to occur, especially since the retirement age has already been raised.


— Lower Benefit Payments

Another option is to lower benefit payments to Social Security recipients. This change is also not very likely, as benefit payments are already fairly low. In fact, the average payment last year and this year to a retiree is only about $1,600 per month. This amount is not really enough to provide the basic necessities, so lowering the amount even more would cause financial hardships for thousands of people.


— Social Security Tax Rate Increase

The current Social Security tax rate is 12.4%. Typically, the employee pays half of the tax, and your employer pays the other half. Self-employed individuals must pay the entire 12.4% tax on their own. Raising the tax rate would mean that more money is collected and placed into the Social Security trust funds each month. More money in the funds means more money to pay benefits, and the reserves would either reach depletion more slowly or not be depleted at all. An increase in the FICA Social Security tax rate is certainly an option that is on the table.


— Social Security Tax Limit Increase

An increase in the Social Security tax limit is coming in 2023. Remember that in 2022, you are only required to pay Social Security taxes on your first $147,000 in earnings. In 2023, this limit will increase to $160,200. Anything you earn above this limit during a calendar year is not subject to Social Security taxes by the IRS. This increase in the tax limit will generate substantial income for the Social Security program since many Americans earn much more than this limit. While no one likes tax increases, this increase could potentially solve Social Security’s solvency problem.


The Bottom Line

The Social Security combined trust funds are used to pay benefits to retired workers and their families, as well as disabled workers and their families. Social Security taxes are collected and placed into the trust funds, and the money is invested in treasury securities. Money in the trust funds is then used to pay benefits to current beneficiaries. The trust funds have enough reserves to continue paying benefits for about 20 more years, but changes will be necessary then since the current taxes collected are not enough to cover the current benefit payments.


Frequently Asked Questions


What is the Social Security Trust Fund balance?

The current Social Security balance in the combined trust funds is roughly $2.8 trillion. That might seem like a lot of money, but remember that Social Security is the largest line item in the federal budget. Millions of dollars in benefits are paid each month. In 2021, the program saw a deficit of $56 billion, and that deficit is projected to increase in the coming years. At the current rate, there is only enough money in the trust funds to pay full benefits for about 20 more years.


What happens to money once it goes into the Social Security Trust Fund?

When money goes into the Social Security trust fund, it is invested in U.S. Treasury securities. The securities are not available on the open market, and the U.S. treasury guarantees the securities for both principal and interest. These securities may be sold at any time for face value, and they are bought and sold frequently as money flows into and out of the trust fund.


How long will the Social Security Trust Fund last?

The Social Security trust fund is likely to last for a long time, although the reserves in the trust fund are only projected to last about 20 more years. Once the reserves are depleted, the trust fund will still be in existence. However, the only money available at that time to pay benefits will be the money coming into the fund from payroll taxes. Without changes, there will only be enough money to pay roughly 80% of Social Security benefits at that time.


What will happen to the Social Security Trust Fund when it is no longer able to cover Social Security payments?

So, what will happen when Social Security runs out? No one knows exactly what the future of Social Security holds. It is estimated that this will occur in about 20 years. The Social Security trust fund should still be able to cover about 80% of its benefit payments. However, Congress needs to act before this occurs to help prevent problems in the future. The most likely change involves increasing Social Security taxes to provide more funding for the program.

Elliot Marks

Elliot Marks

Elliot has spent years providing clear and concise information to help navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.