A:

The Social Security trust fund is an account held with the U.S. Treasury Department. The federal government uses it to record any excess contributions paid into Social Security. The fund only grows when the daily tax receipts obtained from workers and employers is larger than the dollars paid out to those receiving Social Security benefits. When these excess funds accumulate, they do not sit idly; instead, they are invested into special government bonds and made payable in the future to the trust fund. In short, the government borrows money from itself and issues itself a very unique IOU, which must be repaid from future tax receipts.

The Social Security trust fund was initially established as an emergency fund to be used if future receipts were insufficient to meet future guaranteed benefits. Over time, the treatment of the trust fund changed. Today, it operates as a receivables account for the general federal budget. Once money is taken out of the Social Security trust fund, it is treated like any other government revenue.

There are actually two different trust funds: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. Even though they are technically separate accounts, they are funded and borrowed from in the same way. The government bonds that are issued as IOUs into the accounts are the same.

The government bonds themselves are considered to be U.S. Treasury debt securities and are interest-bearing, much like Treasury bills. Unlike other Treasury securities, however, these are not made available on the open market and have no market-based pricing tools. These securities are pegged to the interest rates earned by medium- and long-term Treasury bonds.

The special-issue Treasury bonds held in the trust funds have several unique features. They are always redeemable, at any time, at par. They can be issued in any amount, and there can technically be a limitless number of these securities. According to the Center on Budget and Policy Priorities, the trust funds had earned an average interest of 3.8% on their investments as of 2013.

In the past, the Social Security trust fund actually held standard, public-issue Treasury securities in its accounts. Today, however, only special-issue Treasury securities are in the fund. Both types of funds have no real asset-based collateral, and are only borrowed against the full faith and credit of the U.S. government – not unlike the U.S. dollar.

There is one obvious drawback with the way in which the trust funds are borrowed from and invested in: Future taxpayers are responsible for both their own future benefits as well as the interest-accumulating debt on past collections. The securities held in the Social Security trust fund have to be paid with other government receipts, which can only come in the form of taxes, money printing or borrowing -- all of which, directly or indirectly, reduce the income of taxpayers.

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