Ss Funds: Where Are Your Contributions Invested?

Social Security trust funds are accounts managed by the US Department of the Treasury. They are funded through payroll taxes on working individuals and their employers, and the money is invested in US securities. There are two types of securities: special issues, which are available only to the trust funds, and public issues, which are available to the public. The funds invest any surplus in special-issue US government debt securities, which can be redeemed at face value at any time to pay fund obligations.

Social Security Trust Funds

The funds take in Social Security payroll taxes from workers and their employers and pay out benefits to Social Security recipients. They invest any surplus in special-issue US government debt securities. These securities can be redeemed at face value at any time to pay fund obligations.

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.

In 2021, Social Security costs exceeded total income, including interest, for the first time. A 2024 analysis revealed that the trusts are expected to be able to pay full benefits only until 2035.

The Social Security Trust Funds are required by law to be invested in non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government. These securities earn a market rate of interest. Excess funds are used by the government for non-Social Security purposes, creating obligations to the Social Security Administration and, thus, program recipients.

Old-Age and Survivors Insurance (OASI) Trust Fund

The Old-Age and Survivors Insurance (OASI) Trust Fund is a separate account in the US Treasury. It holds the tax receipts that fund Social Security benefits for retired workers, their spouses and eligible children, and the 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 (FICA) and the Self-Employment Contributions Act (SECA). These taxes are deposited daily and are used to pay monthly Social Security benefits without requiring separate congressional appropriations. The fund is also used to pay benefits under the larger program, the Old-Age, Survivors, and Disability Insurance (OASDI) program.

The SSA invests any OASI Trust Fund inflows that aren't immediately needed to meet current expenses. The fund's investments are made in two types of interest-bearing federal securities: special issues and US Treasury bonds. Special issues are government-backed securities exclusively available to the trust fund, while US Treasury bonds are publicly traded government debt securities. The interest earned from these investments is deposited back into the OASI Trust Fund and may be used for benefit payments.

The OASI Trust Fund has faced financial challenges due to increasing life expectancies and the retirement of baby boomers, resulting in a larger group of retirees than the workforce replacing them. By 2033, the fund is expected to exhaust its surplus, with tax receipts only covering 79% of projected payment obligations.

Disability Insurance (DI) Trust Fund

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 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 employees' paychecks, which matches the contribution from employers to fund the Social Security Trust Fund. SECA payments are made by self-employed business owners, who pay both the employee and employer amounts, based on their net earnings, into the fund.

The DI fund is managed by a six-member board of trustees. Four of these members automatically serve by virtue of their positions in the federal government: the Secretary of the Treasury (who acts as 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. The appointed trustees serve four-year terms.

The DI fund is legally separate from the OASI fund, and the two funds have different investment strategies. The DI fund invests in interest-bearing government securities, with the interest earned also deposited into the fund. The fund provides automatic spending authority to pay monthly benefits to disabled worker beneficiaries and their spouses and children. This means the Social Security Administration does not need to periodically request money from Congress to pay benefits.

Special-issue U.S. government securities

Social Security trust funds are accounts managed by the U.S. Department of the Treasury. They are made up of 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.

If there is a surplus of funds, it is invested in special-issue U.S. government securities. These securities are not publicly traded and can be redeemed at face value at any time to pay fund obligations. They are also backed by the full faith and credit of the U.S. government.

There are two types of special-issue securities: 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 they mature on the next June 30 following the date of issue. The interest rate on these securities is set by a formula established in 1960 through amendments to the Social Security Act.

The special-issue bonds have maturities ranging from one to fifteen years and are acquired when the certificates of indebtedness mature. The interest rate for these bonds is determined by the average market yield on the last day of the prior month for marketable U.S. government debt securities.

In 2023, the trust funds earned an effective interest rate of 2.4%, while the average of the 12 monthly rates for the debt they purchased that year was 4.1%. As of May 2024, the interest rate for new special issue debt was 4.750%.

Investment in private securities

Private securities are investable assets issued by privately owned companies, allowing them to raise capital from a limited number of accredited investors. They are exempt from registration with the Securities and Exchange Commission (SEC) but are still subject to the anti-fraud provisions of the Securities Act of 1933. Private securities are often used by smaller, early-stage, or growing companies, including startups looking to obtain funding for development while delaying or avoiding an initial public offering (IPO).

Private securities can be issued at any stage of a company's development, and the amount raised can range from several hundred thousand dollars to tens of millions. Over the last decade, many private companies have chosen to use private securities to raise capital, giving rise to "unicorns", or privately held companies with multi-billion-dollar valuations.

There are two types of private securities: debt and equity private placements. Debt placements represent an obligation of the issuer, while equity placements represent ownership in the company.

Compared to public stock sales, private securities are relatively unregulated. Companies selling shares privately do not have to register with the SEC, provide a prospectus to potential investors, or disclose detailed financial information. However, they are still subject to certain regulatory requirements and standards.

Private securities may carry a higher degree of risk due to the younger age of the issuing companies, their shorter operating history, or their involvement in developing novel products and services. Additionally, private securities tend to have very limited secondary market liquidity, and investors are restricted from reselling for a period of one year from the date of issuance.

Despite the risks, private securities offer investors the potential for greater returns and the opportunity to diversify their investment portfolios outside of public markets.

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