The Social Security Trust Fund is an account managed by the United States Treasury that takes in Social Security payroll taxes from workers and their employers and pays out benefits to Social Security recipients.

Key Takeaways

  • The Social Security Trust Fund receives payroll taxes, pays out benefits, and invests any surplus in special government securities.
  • Those securities earn interest and are backed by the full faith and credit of the U.S. government.
  • The trust fund is expected to stop running a surplus in 2020, at which time it probably will need to gradually draw down its reserves to pay benefits.
  • The 2019 Social Security Trustees Report shows that retirement/survivor and disability funds will run out in 2035.

How the Social Security Trust Fund Works

The Social Security Trust Fund actually consists of two separate funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. 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 to disabled workers and their families. Otherwise, the two funds work similarly.

When workers and employers pay more money into the Social Security system than it needs to pay benefits, those "excess" contributions are invested in special U.S. government securities. That allows the federal government to borrow money from the trust fund to use for purposes other than Social Security.

The Social Security Trust Fund has no direct connection to the stock market. On a daily basis, funds left after payment of all benefits are invested in special-issue government bonds. They are similar to U.S. Treasury bonds, except that they don't trade publicly. These interest-bearing bonds are a form of IOU to be paid from future FICA tax receipts. 

The special government securities come in two types: short-term certificates of indebtedness, which mature on the following June 30, and bonds, which generally mature in one to 15 years. Neither of these securities is traded in the bond market or available to the public. Like other Treasury securities, however, they are backed by the full faith and credit of the U.S. government.

The interest rate on the special issues is set by a formula established in 1960 through amendments to the Social Security Act. It is roughly the same as the average yield on marketable Treasury securities that are at least four years from maturity. As of 2019, the trust funds were earning an average interest rate of 2.219% on their securities.

Starting in 2020, Social Security may need to dip into its reserves to cover its obligations to benefit recipients.

Today’s Social Security Finances

The 2019 annual report on the trust funds showed these basic facts about its finances:

  • The OASDI trust funds had $2.8949 trillion dollars at the end of 2018—273% of the estimated cost for 2019.
  • Total expenditures for 2018 were $1.000 trillion, and total income was $1.003 trillion.
  • Collectively, OASDI trust fund reserves will be depleted in 2035. Previously, the depletion date was estimated at 2034.
  • Depletion dates are different for the two funds: OASI trust funds are estimated to run out in 2034, and DI reserves in 2052. Last year DI reserves were projected to run out in 2032. The reason for the difference, say the trustees: "DI applications and benefit awards, both of which fell well below levels projected in last year’s report for 2018."
  • When OASI trust funds are depleted in 2034, only 77% of Social Security benefits will be able to be paid based on the “pay as you go” income to the OASI trust fund.
  • When DI funds are depleted, if there is no fix in time, 91% of disability benefits will be able to be paid based on the “pay as you go” income to the DI trust fund.
  • For the 75-year projection period, the actuarial deficit is 2.78% of taxable payroll (decreased from 2.84% last year). In other words, Social Security taxes would need to increase by 2.78% to fix the problem permanently.

Note that the numbers are slightly better than the prior year's report, but far from a sign that the problems are over. Demographics—the huge baby boom generation and the much smaller Gen X one—show that they won't just melt away no matter how good the economy is.

The Future of the Social Security Trust Fund

Social Security is a "pay as you go" system, with taxes on current workers paying for the benefits owed to retired workers and others. For many years, the income Social Security received from payroll taxes was more than sufficient to cover the benefits it was paying out. Over time, the Social Security Trust Fund accumulated a reserve that, at the end of 2018, totaled nearly $2.8 trillion.

That is about to change, however. Social Security's trustees project that starting in 2020, payroll taxes will no longer cover 100% of the program's benefit obligations, so it will need to dip into its reserves each year to cover a portion of them. By current estimates, that means the trust fund will be depleted by the year 2035 unless Congress takes action to address the problem.