What Is the Social Security Trust Fund?

What Is the Social Security Trust Fund?

The Social Security Trust Fund is America's retirement fund, as well as a source of benefits for the blind and disabled. Over 70 million Americans received some Social Security benefit in 2022.

The U.S. Treasury Department manages the trust funds under the direction of a six-member board. Each year, the board reports to Congress on the financial and actuarial status of the trust funds. 

How the Social Security Trust Fund Works

Three sources of income fund Social Security: payroll taxes, interest on excess funds held by the Treasury, and taxes on benefits for current beneficiaries.

Payroll taxes are the primary source of funding for the trust funds. Workers and their employers each contribute 6.2% of their pay, up to the taxable maximum for the year, which is $160,200 for tax year 2023. Self-employed workers pay the full contribution of 12.4%.

History of the Social Security Trust Fund

On August 14, 1935, President Franklin D. Roosevelt signed into law the Social Security Act. The law created a program to pay an income to retired workers age 65 or older. The funds for Social Security came from payroll taxes, known as "FICA." The Social Security Trust Fund was established in 1937 to manage the income collected from these taxes so they could be redistributed as Social Security Income.

Since then, the fund has received more in income than it's paid out in benefits. That's because of America's demographics. There were 2.8 workers for every beneficiary as of 2022. More money has gone into the fund via payroll taxes than has gone out as benefits. It's also been because of tax hikes and adjustments to benefits. In 1977, the payroll tax rate was raised from 6.45% to 7.65%. The trust fund has held a surplus since then.

The fund also receives interest income from its investments in "special issue" securities. The rate of return is determined by a formula enacted in 1960, and it changes each month.

Does Congress Raid Social Security?

The U.S. Treasury must invest Social Security income in "securities guaranteed as to both principal and interest by the federal government." It issues "special issue" securities for use by the trust funds.

There are three differences between these special issue securities and U.S. Treasury bonds: they are not tradable, they are only available to the trust funds, and they are only bought with payroll taxes. The Treasury redeems these bonds, with interest, to pay for benefits. The money to redeem the bonds comes from the General Fund.

After that, the payroll taxes go into the General Fund, where they pay for government expenditures. That's how presidents "borrow" money from the Social Security Trust Fund. The borrowed funds make their deficits look smaller. The real amount owed still shows up in the national debt. It explains why the U.S. debt by president is larger than the U.S. deficit by president.

For this reason, the Heritage Foundation says that the "special issue" securities are "nothing more than IOUs." That's because future benefits will have to come from "taxes that are being used today to pay for other government programs."

Solvency of Social Security

For years, the Board of Trustees warned that the demographic changes that created the surplus would also lead to the fund's demise. As the baby boomers start to retire from the workforce, there will be fewer workers supporting more retirees. That will increase the age dependency ratio.

The financial crisis of 2008 hastened this trend. Higher unemployment meant even lower payroll tax income. In 2010, the Obama tax cuts reduced the OASDI payroll taxes by 2% for the 2011 calendar year, while extending the Bush tax cuts. In fact, that was the first year that income from payroll taxes was not enough to cover benefits. The fund only received $482 billion from payroll taxes but paid out $596 billion in benefits. But its other income, from investments and taxes on the benefits, more than covered its costs.

The fiscal cliff deal ended the 2% payroll tax holiday. Obamacare taxes on high-income households also began in 2013. That increased revenue to the fund and improved its cash flow shortfall. But the Tax Cuts and Jobs Act reduced taxes again. As of 2021, total costs exceed total income, according to the 2021 Social Security Annual Report.

The Social Security Administration currently projects that the OASI Trust Fund will be able to pay full benefits until 2033, at which time it will be able to pay 77% of full benefits. The DI Trust Fund is projected to pay full benefits throughout its 75 year projection range.

Fixing Social Security

There have been a number of different proposals to restore Social Security solvency. Most focus on one or more of these factors: decreasing benefits paid, increasing taxes, or increasing debt.

Here are a few examples of changes that could stabilize the trust funds:

• Raise the retirement age: Raising the full retirement age to 69, and then indexing to longevity, would close 37% of the shortfall, according to a calculator from The Committee for a Responsible Federal Budget.
• Increase payroll taxes: Raising the payroll tax by 3.14% to 15.54% would increase revenue sufficiently to close the gap.
• Eliminate the taxable maximum: Social Security taxes earnings up to a given limit, which changes each year. The earnings limit was $147,000 in 2022 and $160,200 in 2023. The same limit applies to benefits received. By eliminating the taxable maximum, but retaining the cap on benefits, the trust funds would remain solvent for more than 40 years.