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 precisely 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 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 explain exactly how the Social Security trust funds operate and discuss potential changes.
What is the Social Security Trust Fund?
Many people wonder how Social Security is funded; part of the answer is the Social Security Trust Fund.
There are technically two trust funds associated with Social Security: 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. Congress established these trust funds, and the money in them is used to pay benefits to Social Security beneficiaries. The Old Age and Survivors Insurance Trust Fund pays benefits to retired workers, their families, and the families of deceased workers. On the other hand, the Disability Insurance Trust Fund pays 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 money coming into the trust funds. This means that the SSA can use that money to pay monthly benefits without any specific action from Congress.
- Two trust funds, the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund, have also been established to support the Medicare program.
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.
KEY TAKEAWAYS
- Technically, there are two Social Security Trust Funds: The Old Age and Survivor Insurance Trust Fund (OASI Trust Fund) and the Disability Insurance Trust Fund (DI Trust Fund).
- The Trust Funds are used to pay Social Security benefits and are where OASDI taxes are deposited after collection.
- The Social Security Trust Fund currently pays more benefits than it generates in tax revenue. Causing a continual decrease is the excess reserves of the fund.
How do the Social Security Trust Funds work?
Millions of Americans rely on monthly payments from the Social Security trust funds, but few 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, a Board of Trustees 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 trust funds are then used to pay benefits to current beneficiaries. When you pay Social Security income taxes, those taxes do not go into a 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, which 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 approximately 1% of Social Security taxes cover overhead expenses and program costs.
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Investment Allocations in the Social Security Trust Funds
Federal law restricts the types of investments that may be held in Social Security trust funds. Current law requires that all income in the trust funds be invested daily in securities guaranteed by the Federal government for both principal and interest.
- These government securities are considered special issue securities, and they are only available to trust funds and not 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 it was roughly 4.1% in 2023.
In the past, trust funds could hold marketable securities. These securities could potentially incur a loss if redeemed before their maturity date, which could decrease the trust fund balance.
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 budget status in other government areas?
The Social Security surplus can be placed into the trust fund reserves if the rest of the federal government is in excess or has a balanced budget.
These reserves are in place to help make benefit payments during years in which there is a deficit between the taxes collected and the 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 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.
TIP
The SSA must change the Social Security program to ensure its continual viability. It would help if you planned for an eventual increase in the taxes paid or a reduction in the benefits received.
Solvency of the Social Security Program
Many ask, “When will Social Security run out of money?” There have been rumors of this for years.
Unfortunately, recent annual reports from the trustees have shown a shortfall in the Social Security program.
- This means the system pays more monthly expenditures 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 Social Security program’s solvency is in trouble. According to most actuary reports, the trust funds only have enough reserves to continue paying the full benefit for ten 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
Several possible changes to Social Security have been discussed, and some changes are more likely than others. We will discuss the most common changes and tell you which ones will most likely occur.
The Bottom Line
The Social Security combined trust funds are used to pay benefits to retired workers and their families and disabled workers and their families.
Social Security taxes are collected and placed into trust funds, which are invested in treasury securities. The 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 ten more years. Still, changes will be necessary then since the current taxes collected are not enough to cover the current benefit payments.
Frequently Asked Questions
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 most extensive line item in the federal budget. Millions of dollars in benefits are paid each month.
In 2023, the program saw a deficit of $40 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 ten more years.
When money goes into the Social Security trust fund, it is invested in U.S. Treasury securities.
These securities are not available on the open market, and the U.S. treasury guarantees them 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.
The Social Security trust fund will likely last for a long time, although its reserves are only projected to last about ten more years.
Once the reserves are depleted, the trust fund will still exist. 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.
So, what will happen when Social Security runs out? No one knows exactly what the future of Social Security will be.
The Social Security reserve is estimated to run out in 10 years. However, the trust fund should still be able to cover about 80% of benefit payments.
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.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
