Social Security Funds: Where Does The Money Go?

Social Security trust funds are accounts managed by the US Department of the Treasury. There are two types of funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These funds receive payroll taxes, pay out benefits, and invest any surplus in special government securities. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. These securities are available only to the trust funds and are known as special issues.

Special issues vs public issues

Social Security trust funds are accounts managed by the US Department of the Treasury. They consist of the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These funds receive payroll taxes from workers and their employers and pay out benefits to Social Security recipients.

Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities: special issues and public issues.

Special issues are securities available only to the trust funds. They are not traded in the bond market or available to the public. They can be redeemed at face value at any time to pay fund obligations. Special issues come in two types: short-term certificates of indebtedness and long-term bonds. The certificates of indebtedness are issued on a daily basis for the investment of receipts not required to meet current expenditures and mature on the next 30 June following the date of issue. The bonds generally have maturities ranging from one to fifteen years.

Public issues, on the other hand, are marketable Treasury bonds available to the public. They are subject to the forces of the open market and may suffer a loss or enjoy a gain if sold before maturity. In contrast, special issues give the trust funds the same flexibility as holding cash.

In the past, the trust funds have held public issues, but they currently hold only special issues.

Old-Age and Survivors Insurance (OASI)

The Old-Age and Survivors Insurance (OASI) Trust Fund is a separate account in the US Treasury, managed by the Social Security Administration (SSA). The fund holds receipts from payroll taxes that fund Social Security benefits paid to retired workers, their spouses, eligible children, and survivors of deceased insured workers.

The fund has the authority to pay monthly benefits without separate congressional appropriations. This automatic spending authority means the SSA does not need to periodically request money from Congress to pay benefits. The fund was created pursuant to section 201 of the Social Security Act Amendments of 1939 and became effective on January 1, 1940.

The OASI Trust Fund is invested in two types of interest-bearing federal securities:

• Special issues: These are government-backed securities that are only available to the trust fund. They can be redeemed at any time at face value and are not subject to the forces of the open market.
• US Treasury bonds: These are government debt securities that are publicly traded.

The interest earned from these investments is deposited into the OASI Trust Fund and may be used for benefit payments. The fund's Board of Trustees consists of six members, four of whom automatically serve by virtue of their positions in the Federal Government. The other two members are appointed by the President and confirmed by the Senate.

The OASI Trust Fund is projected to exhaust its surplus in 2033, at which point its receipts are expected to amount to 79% of projected payment obligations.

Disability Insurance (DI) Trust Funds

The Disability Insurance Trust Fund (DI) is one of two funds within the Social Security Trust Fund, the other being the Old-Age and Survivors Insurance Trust Fund (OASI). The DI fund was established as part of the Social Security Act Amendments of 1956 and came into effect on January 1, 1957.

The fund provides benefits to those who are mentally or physically incapable of gainful employment, as well as their spouses and children. The fund collects deposits from the Federal Insurance Contributions Act (FICA) tax and the Self-Employed Contributions Act (SECA) tax. FICA is a deduction from employees' paychecks, matching the contribution from employers to fund the Social Security Trust Fund. SECA payments, on the other hand, are made by self-employed business owners, who pay both the employee and employer amounts based on their net earnings.

The DI Trust Fund is a separate account in the US Treasury. A fixed proportion of the payroll taxes received under FICA and SECA are deposited into the fund, depending on the allocation of tax rates by the trust fund. Taxes are deposited daily, and any funds not withdrawn for current costs are invested in interest-bearing federal securities, as required by law. The interest earned is also deposited into the trust fund.

The DI Trust Fund is managed by a six-member board of trustees, four of whom serve by virtue of their positions in the Federal Government. These four members are the Secretary of the Treasury (the Managing Trustee), the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two members are appointed by the President and confirmed by the Senate, serving four-year terms. The board of trustees provides financial oversight and releases annual reports through the Office of the Chief Actuary, detailing the financial status of the Social Security program.

US Treasury securities

Social Security trust funds are accounts managed by the US Department of the Treasury. They consist of the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These funds invest any surplus in special US government debt securities.

These special issues are only available to the trust funds and are distinct from public issues, which are marketable Treasury bonds available to the public. The special issues are short-term certificates of indebtedness, which mature on the following 30 June, and bonds with a term of one to 15 years. They can be redeemed at face value at any time to pay fund obligations.

The interest rate on the special issues is set by a formula established in 1960 through amendments to the Social Security Act. The interest rate for new special issue debt bought by the Social Security trust funds was 4.750% in May 2024.

The trust funds had combined asset reserves of $2.79 trillion at the end of 2023. However, a 2024 analysis revealed that the trusts are expected to be able to pay full benefits only until 2035.

Interest rates

The interest rate for a particular month is determined on the last business day of the previous month and applies to securities issued in the following month. This means that the interest rate for January is set in December, and so on. The interest rates on these special issues are designed to be competitive with market yields for traded US government debt with terms of more than four years.

The interest on special-issue investments is paid semi-annually, at the end of June and December. As the trust funds hold no cash, investments are redeemed monthly to pay for benefits and administrative expenses. When investments are redeemed, interest is paid, and this amount offsets the cost of investment redemptions.

The effective interest rate for a calendar year is calculated by dividing the interest earned on investments during that year by the average level of investments held. This rate reflects the entire portfolio of securities held by the Social Security trust funds. The effective interest rate allows for a measurement of the rate of return on the investment portfolio.

In 2023, the numeric average of the 12 monthly interest rates was 4.125%. The annual effective interest rate for the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds was 2.387%. This lower effective rate resulted from the funds holding special-issue bonds from previous years when interest rates were lower.

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