The Social Security Trust Fund: Where Is It 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. These funds are managed by the Department of the Treasury and are used to pay benefits and administrative costs. By law, income to the trust funds must be invested in securities guaranteed by the Federal Government. These securities are available only to the trust funds and are known as special issues. The funds invest any surplus in these special issue US government debt securities, which can be redeemed at face value at any time to pay fund obligations.

The Social Security trust funds

The funds are primarily financed through payroll taxes on working individuals, with employees and employers each contributing 6.2% of payroll taxes on income below an annual cap of $168,600 for 2024. Self-employed individuals pay the full 12.4%. Additionally, the funds may also receive income from other sources, such as income taxes on benefits paid to higher-income beneficiaries.

The interest rate on the special issues is determined by a formula established in 1960, with the rate set at the end of each month for new investments in the following month. The average of the 12 monthly interest rates for 2023 was 4.125%, resulting in an annual effective interest rate of 2.387% for the combined OASI and DI Trust Funds.

The two types of securities

The Social Security trust funds are financial accounts in the US Treasury. There are two separate Social Security trust 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 are used to pay benefits and administrative costs.

• Special issues: securities available only to the trust funds. These are special-issue US government securities, also known as special issue debt. They are not traded in the bond market or available to the public. However, they are backed by the full faith and credit of the US government. The special government securities include short-term certificates of indebtedness, which mature the following June 30, and bonds with terms of one to 15 years.
• Public issues: securities available to the public (marketable securities). The trust funds do not currently hold any public issues but have done so in the past.

Special issues vs public issues

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. These funds are managed by the Department of the Treasury through their Bureau of the Fiscal Service.

Since the Social Security program began, all securities held by the trust funds have been issued by the Federal Government and are regarded as some of the world's safest investments. There are two types of securities: special issues and public issues.

Special Issues

Special issues are securities that are available only to the trust funds. There are two types of special issues: short-term certificates of indebtedness and long-term bonds. Certificates of indebtedness are issued daily for the investment of receipts not required to meet current expenditures and mature on the next 30 June following the date of issue. Special-issue bonds are usually acquired when special issues of either type mature on 30 June, with maturities ranging from one to fifteen years.

Public Issues

Public issues are marketable Treasury bonds available to the public. The trust funds have held public issues in the past but now only hold special issues.

The trust funds hold money not needed in the current year for benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the US Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds mature or are needed to pay benefits, the Treasury redeems them.

How the trust funds work

The Social Security trust funds are financial accounts in the U.S. Treasury, managed by the Department of the Treasury. There are two separate Social Security trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.

The funds receive payroll taxes from workers and their employers and pay out benefits to Social Security recipients. They invest any surplus in special issue U.S. government debt securities. These securities are available only to the trust funds and are backed by the full faith and credit of the U.S. government. The U.S. government has never defaulted on its obligations, and investors consider U.S. government securities one of the world's safest investments.

The Social Security trust funds hold money not needed in the current year to pay benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.

Social Security is largely a "pay as you go" program, meaning today's benefits are funded primarily by the payroll taxes collected from today's workers. 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. In 2021, Social Security began redeeming those reserves to help pay benefits.

A Board of Trustees oversees the financial operations of the trust funds and reports annually to Congress on their financial status.

The future of the trust funds

The future of the Social Security trust funds is a topic that has been subject to much discussion and analysis. The trust funds are invested in special-issue U.S. government securities, which are considered to be among the world's safest investments. These securities are backed by the full faith and credit of the U.S. government, which has never defaulted on its obligations.

However, there are concerns about the long-term financial stability of the Social Security program. Starting in 2021, Social Security began drawing down trust fund reserves to help pay for benefits, and the program now faces a modest long-term financial shortfall. This shortfall amounts to 1.3% of GDP over the next 75 years. The combined trust funds are not expected to be depleted until around 2034, but this projection varies across different sources, with some stating 2035 as the expected depletion date. This gives policymakers time to address the shortfall and develop a financing plan.

There are a few potential options to address the shortfall, including increasing Social Security's income, reducing its benefits, or a combination of both. Acting sooner rather than later would spread the burden across more generations and allow for smaller future adjustments. For example, if tax increases were implemented gradually, current workers could contribute to restoring solvency, whereas delayed tax increases would fall entirely on younger workers and require a larger increase. However, future generations are expected to be more prosperous and better able to afford adjustments. Policymakers will need to carefully balance these considerations.

Another important consideration is the need for broad public discussion and analysis of the long-range financing problems of the Social Security program. This will be essential in developing a strong support base for any changes made to the program. While there is no imminent crisis, policymakers must act to strengthen the program's long-term finances and ensure the continued availability of its modest but critical benefits.

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