Social Security Trust Fund: Invested Or Not?

The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the US Department of the Treasury. They are funded through payroll taxes on working individuals, and the money is invested in US securities. At the start of 2024, the funds had approximately $2.79 trillion in assets, with the expectation that the trust funds combined would not have enough money to pay out full benefits by 2035.

The two types of Social Security Trust Funds

The OASI Trust Fund pays retirement and survivor benefits to retired workers and their families, as well as to the families of deceased workers. The DI Trust Fund, on the other hand, pays disability benefits to disabled workers and their families. In 2023, benefit payments accounted for about 99% of the total cost of the combined funds.

Both funds are legally distinct but are often referred to collectively as "the Social Security trust fund". All of Social Security's payroll taxes and other earmarked income are deposited into these funds, and all benefits and administrative expenses are paid from them. Social Security is largely a "pay-as-you-go" program, meaning that today's benefits are funded primarily by the payroll taxes collected from today's workers. However, for over three decades, Social Security collected more in payroll taxes and other income than it paid in benefits and other expenses, and the Treasury invested the surplus in interest-bearing Treasury securities, ultimately reaching a total of $2.9 trillion in trust fund reserves by 2021.

By law, income to the trust funds must be invested daily in securities guaranteed by the Federal government. All securities held by the trust funds are special issues of the US Treasury, which are only available to the trust funds. In the past, the trust funds have also held marketable Treasury securities, which are available to the general public.

The two purposes of the Social Security Trust Funds

The two Social Security Trust Funds, the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund, serve two purposes. Firstly, they provide an accounting mechanism for tracking all income to and disbursements from the trust funds. Secondly, they hold the accumulated asset reserves. These reserves provide automatic spending authority to pay benefits.

The OASI Trust Fund pays retirement and survivor benefits, while the DI Trust Fund pays disability benefits. These funds are accounts managed by the Department of the Treasury and are invested in special Treasury bonds that are guaranteed by the US government. The funds receive payroll taxes and pay out benefits to retirees, disabled workers, and survivors.

The Social Security Trust Funds are largely "pay as you go" programs, meaning that today's benefits are funded primarily by the payroll taxes collected from today's workers. However, for over three decades, Social Security collected more in payroll taxes and other income than it paid in benefits, and the surplus was invested in interest-bearing Treasury securities. In 2021, Social Security began redeeming those reserves to help pay benefits, and the trust funds swung to an annual funding shortfall.

How the Social Security Trust Funds are invested

The Social Security Trust Funds are financial accounts in the US Treasury, comprising two separate funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The OASI fund pays retirement and survivor benefits, while the DI fund covers disability benefits. These funds are managed by the Department of the Treasury and serve two main purposes: providing an accounting mechanism for tracking income and disbursements, and holding accumulated asset reserves to automatically pay benefits.

By law, income to the trust funds must be invested daily in securities guaranteed by the Federal government. All securities held by the trust funds are "special issues" of the US Treasury, which are only available to the trust funds. These special issues can be redeemed at any time at face value, giving the trust funds the same flexibility as holding cash.

In the past, the trust funds have also held "public issues" or marketable securities, which are available to the general public. However, these are subject to the forces of the open market and may result in a loss or gain if sold before maturity.

The rate of interest on special issues is determined by a formula established in 1960. The interest rate for each month is set at the end of the previous month and applies to new investments in the following month. The average interest rate for 2023 was 4.125%annual effective interest rate for the combined OASI and DI Trust Funds was 2.387%.

The Social Security Trust Funds are considered a safe investment, backed by the full faith and credit of the US government. Monthly reports are available from the Bureau of the Fiscal Service, providing data on the amount held, type of security, interest rate, and maturity date.

The financial status of the Social Security Trust Funds

The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. They are accounts managed by the US Department of the Treasury.

The Trust Funds serve two purposes: they provide an accounting mechanism for tracking all income to and disbursements from the funds, and they hold the accumulated asset reserves. These reserves provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.

The OASI Trust Fund pays retirement and survivor benefits, while the DI Trust Fund pays disability benefits. Benefits to retired workers and their families, and to families of deceased workers, are paid from the OASI Trust Fund. The DI Trust Fund covers benefits for disabled workers and their families.

The Trust Funds are funded through a withholding tax that deducts a set percentage of pretax income from each paycheck. If contributions made by workers and employers exceed what's needed to fund benefits payments, the funds invest the surplus in US government debt.

The Trust Funds are invested in "special-issue" securities. These are US government securities that are only available to the Trust Funds and are guaranteed by the full faith and credit of the US government. They are considered to be among the world's safest investments.

In the past, the Trust Funds have held marketable Treasury securities, which are available to the general public. However, they currently only hold special issues. These can be redeemed at any time at face value, giving the Trust Funds the same flexibility as holding cash.

The Trust Funds had combined asset reserves of $2.79 trillion at the end of 2023. A 2024 analysis revealed that the trusts are expected to be able to pay full benefits until 2035. However, the OASI Trust Fund's reserves are projected to run out in 2033 unless Congress acts to address the shortfall.

The future of the Social Security Trust Funds

The Social Security Trust Funds are comprised of two separate funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These funds are managed by the Department of the Treasury and serve as financial accounts that provide an accounting mechanism for tracking income and disbursements. They also hold accumulated asset reserves that provide automatic spending authority to pay benefits to retired, disabled, and deceased workers and their families.

To address this, lawmakers have several options for changes, including increasing payroll taxes, reducing benefits, or a combination of both. Taking action sooner rather than later will allow for a broader range of solutions and provide more time for the public to adjust to any changes.

The Social Security Trust Funds have faced similar challenges in the past. In 1982, the reserves of the OASI Trust Fund were nearly depleted, but Congress enacted temporary emergency legislation that allowed for borrowing from other Federal trust funds, and subsequent legislation strengthened the fund's financing. This experience, along with ongoing projections and analysis, provides valuable insights for addressing the current and future challenges facing the Social Security Trust Funds.

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