Social Security Trust Fund: Where Does It Invest?

The Social Security Trust Funds are accounts managed by the US Department of the Treasury. There are two separate funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The funds invest surplus payroll tax contributions made by workers, employers, and independent contractors in special-issue US government debt securities. These securities are available only to the trust funds and can be redeemed at face value at any time to pay fund obligations.

The two types of Social Security Trust Funds

The OASI Trust Fund is used to pay benefits to retired workers and their families, as well as to the families of deceased workers. The DI Trust Fund covers benefits for disabled workers and their families. The OASI trust fund receives 10.6% of employee earnings covered by Social Security payroll taxes, while the DI trust fund receives the other 1.8%.

The Social Security trust funds are limited by law to investing their reserves in US government debt. Although the funds have held marketable securities in the past, they typically and currently own only special US debt issued expressly for use by the trust funds. These special government securities come in two types: short-term certificates of indebtedness, which mature on the following June 30, and bonds with a term of one to 15 years. The special issues are not traded in the bond market or available to the public but are backed by the full faith and credit of the US government.

The interest rate on the special issues is set by a formula established in 1960 through amendments to the Social Security Act. For special issue debt issued to the trust funds in a given month, the interest rate is the average market yield on the last day of the prior month for marketable US government debt securities not due or callable for more than four years, rounded to the nearest one-eighth of a percentage point.

The Social Security trust funds had combined asset reserves of $2.79 trillion at the end of 2023. However, the funds' expenditures are expected to exceed total income, and the reserves are projected to run out by 2035.

The two purposes of the Social Security Trust Funds

The Social Security Trust Funds are accounts managed by the US Department of the Treasury. There are two separate funds, each with a distinct purpose:

Old-Age and Survivors Insurance (OASI) Trust Fund:

• This fund serves as an accounting mechanism to track income and disbursements.
• It holds accumulated asset reserves, providing automatic spending authority to pay benefits to retired workers, their families, and the families of deceased workers.
• The OASI Trust Fund helps manage surplus contributions to the Social Security system. It holds payroll tax contributions from workers, employers, and self-employment taxes from independent contractors.
• As of Q1 2024, the combined reserves of the OASI and DI funds amounted to approximately $2.77 trillion.
• The OASI fund is expected to run out of surplus funds by 2033, after which payroll taxes are projected to cover only 79% of scheduled benefits.

Disability Insurance (DI) Trust Fund:

• This fund also serves as an accounting mechanism and holds accumulated asset reserves.
• It pays benefits to disabled workers and their families.
• The DI fund is projected to have sufficient funding through 2098 due to declines in disability claims.
• Combined, the OASI and DI funds are expected to be able to pay full benefits until 2035.

The types of securities the funds invest in

The 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. The OASI fund is used to pay benefits to retired workers and their families, as well as to the families of deceased workers. The DI fund covers benefits for disabled workers and their families.

The funds invest in special-issue US government securities, which are available only to the trust funds and cannot be publicly traded. These securities can be redeemed at face value at any time to pay fund obligations. The interest rate on these securities is determined by a formula enacted in 1960 and is based on the average market yield of US government debt with terms of more than four years.

The trust funds have also held marketable securities in the past, which are available to the public. However, they currently only hold special issues. These special issues come in two types: short-term certificates of indebtedness, which mature on the following 30 June, and bonds with terms of one to 15 years.

The Social Security trust funds are limited by law to investing their reserves in US government debt. This debt is issued and guaranteed by the "full faith and credit" of the federal government. These securities earn a market rate of interest.

The interest rates on the securities

The interest rate on new securities acquired by the trust funds is the average of market yields for traded U.S. government debt with terms of more than four years, rounded to the nearest one-eighth of a percentage point. These are known as "special issues" and are only available to the trust funds, as opposed to "public issues", which are available to the public.

The special issues held by the trust funds can be redeemed at face value at any time to pay fund obligations. This is in contrast to public issues, which are subject to the forces of the open market and may make a gain or loss if sold before maturity.

The average of the 12 monthly interest rates for 2023 was 4.125%. However, 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 was due to the funds holding special-issue bonds acquired in previous years when interest rates were lower.

In May 2024, the interest rate for new special issue debt bought by the Social Security trust funds was 4.750%.

The future of the Social Security Trust Funds

Demographic and Economic Factors

The aging US population and the retirement of the Baby Boomer generation are key factors impacting the Social Security Trust Funds. With more retirees and fewer workers, the ratio of contributors to beneficiaries is declining, leading to funding shortfalls. This demographic shift is expected to result in widening deficits for the Social Security program.

Legislative Proposals

To address the projected shortfalls, various legislative proposals have been put forward:

• Raising the retirement age: Increasing the retirement age would reduce government expenditures on Social Security benefits.
• Tax increases: Higher payroll taxes or new taxes for high-income earners could boost revenue for the Trust Funds.
• Borrowing: The government could borrow funds to maintain benefit payments without increasing receipts.
• Cutting benefits: Reducing benefit payments or implementing a combination of the above approaches.

Investment Strategies

The Social Security Trust Funds primarily invest in special-issue US government securities, which are low-risk and provide a stable source of income. These securities are backed by the "full faith and credit" of the federal government and are redeemable at face value at any time. This investment strategy ensures the Trust Funds have a secure source of income, even during economic downturns.

Long-Term Projections

According to the Social Security Trustees, program costs are expected to exceed non-interest income. The Trust Funds are projected to be depleted by 2035, after which payroll taxes are anticipated to cover only about 83% of program obligations. However, this projection assumes no changes to the current legislative framework.

In conclusion, the future of the Social Security Trust Funds depends on a combination of demographic, economic, and political factors. While the funds are currently stable, legislative action will likely be required to ensure their long-term solvency and maintain benefit payments to retirees and disabled workers.

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