Our Social Security Savings: Where Are They Invested?

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

Any surplus in the funds is invested in special-issue, non-marketable US government debt securities. These securities are redeemable at face value at any time and earn a market rate of interest. The interest rate on new securities acquired by the trust funds is the average of market yields for traded US government debt with terms of more than four years.

The Social Security Trust Funds are off-budget and treated separately from other federal spending. They are required by law to be invested in securities issued and guaranteed by the full faith and credit of the federal government.

Social Security Trust Fund investments

Social Security Trust Funds are accounts managed by the US Department of the Treasury. They consist of two funds: 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.

The funds are invested in US government securities, specifically non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government. These securities are not publicly traded and can be redeemed at face value at any time to pay fund obligations. The interest rate on these securities is based on the average market yield for US government debt with terms of more than four years.

The Social Security Trust Funds have been accumulating surpluses for many years, investing the excess funds in special US government debt securities. By the end of 2021, the combined funds had accumulated $2.9 trillion in reserves. However, in 2021, Social Security costs exceeded total income, and the funds began redeeming reserves to help pay benefits.

The OASI and DI Trust Funds had combined asset reserves of $2.79 trillion at the end of 2023. It is projected that the OASI Trust Fund reserves will run out in 2033, while the DI Trust Fund reserves are expected to last until 2098. Once the OASI Trust Fund is depleted, payroll tax receipts will only be able to cover about 79% of scheduled Social Security benefits.

There have been proposals to address the expected shortfall, including reducing government expenditures, increasing taxes, and borrowing. Some have suggested investing a portion of the Social Security reserves in private securities to boost returns. However, this option has faced opposition due to concerns about political interference and the potential impact on markets.

The Old-Age and Survivors Insurance Trust Fund

The Old-Age and Survivors Insurance (OASI) Trust Fund is a separate account in the United States Treasury. It holds the tax receipts that fund Social Security benefits paid to retired workers, their spouses, eligible children, and survivors of deceased insured workers. The fund is managed by the Social Security Administration (SSA), which has the authority to distribute OASI Trust Fund benefits to eligible recipients.

The fund holds receipts from payroll taxes under the Federal Insurance Contributions Act and the Self-Employment Contributions Act. Taxes are deposited in the fund on every business day. The fund has the authority to pay monthly benefits without requiring separate congressional appropriations.

The OASI Trust Fund was established on January 1, 1940, under the Social Security Act Amendments of 1939. It superseded the old-age reserve account established under the Social Security Act of 1935. The fund is governed by a Board of Trustees, consisting of six members, four of whom are federal government officials, and the remaining two are appointed by the President and confirmed by the Senate.

The OASI Trust Fund invests any inflows that aren't needed to meet current expenses in interest-bearing federal securities. The money is invested in two types of securities: special issues, which are government-backed and available only to the trust fund, and U.S. Treasury bonds, which are publicly traded government debt securities. The interest earned is also deposited into the trust fund.

The OASI Trust Fund is expected to exhaust its surplus in 2033, after which its receipts are projected to cover only 79% of payment obligations. The fund faces financial challenges due to increasing life expectancy and the retirement of baby boomers, a larger age group than the one replacing them in the workforce.

The Disability Insurance Trust Fund

The DI fund pays Social Security benefits to those who are mentally or physically incapable of gainful employment. Spouses and children of recipients may also receive benefits. 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 the paychecks of employees, which matches the contribution from employers to fund the Social Security Trust Fund, while SECA payments are made by self-employed business owners.

The DI fund has a special budgetary status, meaning that neither Congress nor the President can use the fund's receipts and disbursements towards the federal budget. This is because the fund raises money from dedicated taxes, creating a fiscal firewall between Social Security funds and federal spending. However, surplus revenue from the fund eventually makes its way into federal coffers as the fund purchases interest-bearing government securities.

The DI fund is overseen by a six-member board of trustees, four of whom fill their seats by virtue of their positions in the Federal Government. These four 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 trustees are appointed by the President and confirmed by the Senate, and they serve four-year terms. The board releases annual reports through the Office of the Chief Actuary, which publishes the financial status of the Social Security program.

In 2024, Social Security trustees projected the DI fund to remain solvent until 2035, a significant improvement over a 2015 forecast that warned of imminent insolvency.

The future of the Trust Funds

Since the Social Security program began, all securities held by the trust funds have been issued by the Federal Government. These securities are of two types: special issues, which are only available to the trust funds, and public issues, which are available to the public (marketable securities). While the trust funds now hold only special issues, they have held public issues in the past.

The trust funds' cash flows and their effects on the budget of the federal government have been a key focus of discussion. While some observers view the trust fund reserves and interest income as accounting fictions, others argue that they are, for all practical purposes, as real as those of any bank account.

The trust funds are self-financing, and an improvement in their finances will not relieve the accumulated debt commitments of the rest of the federal government. The trust funds cannot borrow or go into debt but can build up reserves through a series of annual surpluses. Once the reserves have been accumulated, they can be drawn back down through a series of annual deficits.

The trust funds' surpluses have, in the past, been used to mask and encourage larger general account deficits. However, this is unlikely to be a long-term issue as any increase in the trust fund surplus would need to be met with a corresponding general account deficit, and the increase in trust fund reserves would require an increase in general account debt.

The trust funds' reserves are assets, and the interest on these reserves reduces the consolidated budget deficit. This interest income is a critical component of the fund's income, especially when a large reserve is built up in advance of a demographic wave of retirements.

The Trust Funds' financial status

The Social Security program in the United States is a fundamental social insurance program that provides protection against the loss of income due to retirement, disability, or death. The Social Security Administration (SSA) manages the program, and its finances are primarily held in two separate trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.

As of 2022, the financial status of the Social Security Trust Funds can be described as follows:

The OASI Trust Fund, which pays retirement and survivors benefits, held approximately $2.9 trillion in assets as of the end of 2021. The primary source of income for this fund is the payroll taxes paid by workers and their employers, which accounted for about 89% of the total income in 2021. The fund also receives income from taxes on Social Security benefits and interest earned on its investments. On the other hand, the DI Trust Fund, which pays benefits to disabled workers and their families, had assets totaling about $125 billion in the same year. This fund also relies mainly on payroll taxes, which accounted for around 91% of its income in 2021.

While the Social Security program has built up substantial reserves over the years, the Trust Funds' investment portfolio is conservative and limited by law. By law, the Social Security Trust Funds can only invest in securities guaranteed by the US government, which essentially means that they invest in special-issue US Treasury bonds. These bonds are a low-risk investment, but they also have a relatively low rate of return compared to other potential investments. This conservative investment strategy ensures the preservation of capital and the ability to meet benefit payment obligations.

The financial health of the Trust Funds is a key concern for policymakers and the public alike. In 2021, the OASI Trust Fund's expenses exceeded its total income, including interest, for the fourth consecutive year. This means that the fund had to redeem some of its special-issue Treasury bonds to make benefit payments. The DI Trust Fund, however, had a positive net income, allowing it to increase its asset reserves.

Looking ahead, the financial outlook for the Social Security Trust Funds depends on various economic and demographic factors. The latest projections from the SSA's Board of Trustees indicate that, under current law, the OASI Trust Fund will be able to pay full benefits on time until 2034. From 2022 onwards, the fund's reserves will be used to meet benefit obligations. The DI Trust Fund is projected to remain solvent through 2057, assuming no legislative changes are made.

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