Social security

What’s the social security trust fund?

When you pay social security taxes, these funds are deposited in the Social Security Trust Fund. Find out what a Social Security Trust Fund is and how it works.

3 min read

If your employer withholds money from your paycheck for Social Security, it means you are paying into the Social Security System. All Social Security payroll taxes are deposited into the Social Security Trust Fund, and these funds are then used to pay benefits to eligible workers as well as administrative expenses for running the trust fund.

Social Security Trust Fund refers to the financial accounts managed by the US treasury that hold surplus contributions made by workers and employers to the Social Security system. It comprises two separate Social Security trust funds i.e. the Old Age and Survivors Insurance (OASI) Trust Fund which pays benefits to retired workers and survivors of deceased workers and the Disability Insurance (DI) Trust fund which pays disability benefits.

How Social Security Trust Fund Works

SSA's financial operations are managed through two trust funds i.e. the Old-Age and Survivor's Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. Social Security payroll taxes deducted from workers' wages are deposited in the trust funds, and all Social Security benefits and operational expenses are paid out from the trust.

Originally, Social Security was designed as a “pay-as-you-go” system, where contributions from workers paid most of the benefits. This means that the contributions coming into the Social Security system each year are used to pay benefits to eligible workers almost immediately. For the past three decades, the Social Security Administration (SSA) collected more taxes and other incomes than the total benefits paid out, resulting in surplus revenues. However, starting in 2021, SSA started redeeming its trust fund reserves to meet its annual deficit.

What is the Old Age and Survivor’s Insurance Trust Fund?

The Old Age and Survivors Insurance (OASI) is a trust fund that is used to deposit payroll taxes that pay benefits to eligible retired workers and their beneficiaries. This fund was established on January 1, 1940, and it is administered by the SSA. OASI holds funds deposited from the FICA and SECA taxes. SSA has automatic spending authority to pay benefits to retired workers without requiring Congressional approval.

SSA invests the surplus OASI funds that are not required for current expenses. The funds are invested in two main types of funds i.e. special issues and US treasury bonds. Special issues are government-backed bonds that are only available to OASI, while the US Treasury bonds are publicly-traded government-backed securities. Any earnings from these investments are deposited into the OASI trust fund and used to pay benefits to eligible workers.

What is the Disability Insurance Trust Fund?

The Disability Insurance (DI) Trust Fund was established in 1956, and it pays benefits to workers who are physically or mentally incapable of gainful employment. This trust fund collects deposits from FICA and SECA taxes.

The DI trust fund also raises revenue to fund itself by investing surplus revenues in interest-bearing government securities. Surpluses occur when the deposits from payroll taxes exceed the benefits paid out to eligible workers. The surplus revenue is invested in US government securities, which DI holds in the trust. If DI starts running a deficit i.e. benefits paid out exceed the contributions paid in, SSA can redeem the securities held in the trust fund to cover the deficit.

How are Social Security Trust Funds invested?

The funds deposited in the Social Security Trust Fund are invested in US Treasury securities, which are backed by the “full faith and credit” of the US government. US treasury securities are considered some of the safest securities since the US government has never defaulted on its debt obligations. This allows the federal government to borrow money from the trust fund for development and other purposes.

As of 2021, the Social Security Trust Fund had accumulated $2.9 trillion worth of reserves, which earn about 1.4% interest annually. The trust fund invests surplus cash daily after payment of all benefits. The SSA publishes monthly reports on its treasury securities holdings, interest rates, and maturity dates.

What is the financial status of the Social Security Trust Fund?

Although Social Security is adequately financed in the short term, it faces a financial shortfall in the long term. Over the years, Social Security ran a surplus, where the total taxes collected and other incomes exceeded its costs. However, starting in 2021, Social Security’s total costs exceeded its total income, resulting in a deficit. In this case, the Social Security Trust Fund's reserves supplement the SSA's incomes to enable the program to pay full benefits to eligible workers and their beneficiaries.

As of 2022, the DI trust fund cash reserves are expected to last for the next 75 years, while the OASI trust fund cash reserves are expected to last until 2034. At that point, SSA will still pay 80% of the benefits using its tax income, but this means that eligible workers will not receive the full benefits. As a result, the US Congress needs to act to replenish the funds in the long term.

How much longer will Social Security Trust Fund last?

The 2022 Social Security Trustees annual report shows that the Social Security Trust Fund will deplete cash reserves by 2034. This means that, if no changes are made to replenish the reserves, the trust fund will exhaust its cash reserves by 2035, and it will only pay benefits from the income it receives in Social Security taxes. When this happens, Social Security will only be able to pay about 80% of the benefits that eligible workers are entitled to.

With $2.9 trillion in cash reserves as of 2021, the trust funds are increasingly paying more benefits than the incoming income, resulting in annual deficits. This means that the cash reserves are continually getting depleted as more baby boomers retire, leaving fewer workers to support benefits recipients.