Investments Funding Social Security: State-Sponsored Retirement Plans

Social Security is funded by payroll taxes from US workers and their employers, which are invested in special-issue US government securities. These securities are considered among the world's safest investments and can be redeemed as needed to pay fund obligations. In addition to payroll taxes, Social Security also receives income from interest on investments and federal income taxes on benefits. While Social Security has historically taken in more money than it paid out, it is projected to face a long-term financial shortfall, with its combined trust funds expected to be depleted by 2035.

The Old-Age and Survivors Insurance Trust Fund

Social Security's financial operations are handled through two federal trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The OASI Trust Fund is a separate account in the US Treasury, managed by the Social Security Administration (SSA), which holds the tax receipts that fund Social Security benefits paid to retired workers, their surviving spouses, and their eligible children.

The fund provides automatic spending authority to pay monthly benefits to retired workers and their spouses and children, and to survivors of deceased insured workers. This means the Social Security Administration does not need to periodically request money from Congress to pay benefits. The fund also invests any surplus in interest-bearing federal securities, as required by law. The interest earned is deposited back into the trust fund.

The OASI Trust Fund has been an important part of the US social safety net, alongside Medicare and Medicaid. It is projected to run out of surplus funds in 2033, at which point its receipts are expected to cover only 79% of projected payment obligations.

The Disability Insurance Trust Fund

The 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 from self-employed business owners, who pay both the employee and employer amounts.

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 (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, 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. The Social Security Administration (SSA) reviews its finances each year and can alter payouts and eligibility requirements.

In 2024, Social Security trustees projected the trust fund to remain solvent until 2035. This is an improvement on the 2015 forecast, which warned that insolvency was imminent. However, the combined OASI and DI trust funds are expected to be able to pay full benefits only until 2035.

The trust funds' investment in Treasury securities

Social Security trust funds are accounts managed by the US 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 from workers and their employers and pay out benefits to Social Security recipients.

The Social Security trust funds are invested in Treasury securities. These securities are regarded as some of the world's safest investments and are just as sound as all other US government securities. 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 funds hold special-issue US government securities, which are redeemable as needed. In contrast to publicly traded US government debt, these securities can be redeemed at face value at any time to pay fund obligations. The special government securities come in two types: short-term certificates of indebtedness, which mature on the following June 30, and bonds with terms of one to 15 years.

The trust funds had accumulated $2.9 trillion worth of Treasury securities by the end of 2021, earning an average interest rate of 2.3%. The interest rate for new special issue debt purchased by the Social Security trust funds was 4.750% in May 2024.

The trust funds' surplus

The Social Security trust funds are invested in Treasury securities, which are regarded as some of the world's safest investments. These securities are just as sound as all other U.S. government securities, held by investors around the world. The Social Security trust funds are managed by the Department of the Treasury and consist of two types of funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. While legally distinct, they are often referred to collectively as "the Social Security trust fund."

The trust funds work as a "pay as you go" program, meaning that 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 expenses, resulting in a surplus. This surplus was invested in interest-bearing Treasury securities, ultimately reaching a total of $2.9 trillion in trust fund reserves.

In 2021, Social Security began redeeming those reserves to help pay benefits, marking the first year that Social Security's total cost exceeded its total income. Despite this, the trust funds' reserves will supplement the program's income, allowing Social Security to continue paying full benefits until around 2035. Even if the trust funds run out of Treasury bonds to cash in, benefits will not stop. Social Security's income will still be able to pay roughly 83% of promised benefits.

The Social Security trust funds are limited by law to investing their reserves in U.S. government debt securities. By investing the surplus in these securities, the federal government can borrow money from the trust funds for purposes other than Social Security, while the trust funds earn investment income with minimal risk.

The trust funds' projected depletion

The projected depletion of the Social Security Trust Funds, which consist of the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund, is a significant concern for policymakers and the general public alike. While Social Security began drawing down trust fund reserves to supplement benefit payments in 2021, the combined trust funds are not expected to be depleted until around 2035. This timeline gives policymakers time to address the long-term financial shortfall and develop a carefully crafted financing plan.

The OASI Trust Fund, which provides benefits to retired workers and their families, is projected to be depleted earlier, by 2033. At that point, ongoing payroll tax receipts will only be able to cover 79% of the scheduled Social Security benefits for retirees and their families. On the other hand, the DI Trust Fund is projected to be solvent until at least 2098, with sufficient funds to pay out 100% of benefits.

The depletion of the trust funds has been a known issue for several years, and lawmakers have had ample time to address it. However, the projected depletion date remains relatively unchanged. It is crucial for policymakers to act soon to ensure the sustainability of these critical programs and avoid sudden and significant cuts to beneficiary payments.

The Social Security trust funds are invested in special-issue U.S. government securities, which are considered among the world's safest investments. These securities are backed by the full faith and credit of the U.S. government and can be redeemed at face value at any time to meet current obligations. The interest rates on these securities are determined by a formula established in 1960 and are set to average market yields for traded U.S. government debt.

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