What are the Social Security Trust Funds?

Key Points

• The Social Security Trust Funds hold the Social Security taxes paid by American workers.

• The trust funds are invested in Treasury securities that earn interest, helping the funds to grow.

• Four years ago, Social Security began to draw from the trust fund reserves to help pay benefits.

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Given how often the subject of Social Security solvency comes up, it would be easy to imagine that everyone understands how it works, including the all-important trust funds. This is a basic primer on the role that both of these trust funds play.

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There are two trust funds

Usually, the phrase you'll hear is "Social Security Trust Fund." However, two trust funds are associated with Social Security benefits. While referred to collectively, here's the difference between the two funds.

• Old-Age and Survivors Insurance Trust Fund (OASI): Pays retirement and survivors benefits
• Disability Insurance (DI) Trust Fund: Pays disability benefits

Why the trust funds exist

The purpose of each trust fund is to ensure there's enough money to pay benefits to eligible recipients. Whether that's a retired worker, disabled worker, or survivor of a deceased worker, the fund is meant to provide a safety net of income.

The trust funds maintain the program's stability and reliability. The funds can become depleted when the SSA collects less in Social Security payroll taxes than it pays out.

How the trust funds are financed

The trust funds are financed primarily through Social Security payroll taxes collected under the Federal Insurance Contributions Act (FICA). Half of your portion of Social Security payroll taxes is paid by you (via a deduction from your paycheck), and your employer pays the other half. If you're self-employed, you're responsible for paying both the "employee" and "employer" portions.

When the Social Security Administration (SSA) collects more in payroll taxes than it pays out in benefits, it invests the surplus in special U.S. Treasury securities. As these investments earn interest, the fund grows and remains available to help pay future benefits.

Why the current concern?

Social Security is a "pay as you go" program, meaning money collected today in payroll taxes goes toward paying current Social Security recipients. According to the Center on Budget and Policy Priorities (CBPP), for more than 30 years, the SSA collected more in payroll taxes and other income than it paid in benefits and expenses. This resulted in a nice surplus that eventually reached $2.9 trillion.

However, by 2021, the SSA was forced to dip into those trust funds to continue making full payments to beneficiaries. The shortfall is due to a variety of factors, including:

• Declining worker-to-beneficiary ratio: Back in 1940, there were a whopping 159.4 workers for each Social Security beneficiary. By 1960, that number had fallen to 5.1 workers for every beneficiary, and in 2022, the ratio dropped to 2.8 for each beneficiary. The pay-as-you-go system relies on taxes from current workers to cover Social Security benefits, helping to explain why the retirement trust is in danger of running dry.
• Longer life expectancies: Longer lives mean people collect benefits for more years.
• Lower birth rates: Declining birth rates in the U.S. mean fewer workers who will enter the workforce and pay Social Security payroll taxes.
• Tax loophole for high earners: High earners have seen their earnings increase much faster than moderate earners. And yet, the Social Security payroll tax cap has not kept pace. Currently, a worker pays Social Security payroll taxes on the first $176,100 earned. For example, a person earning $1 million annually pays Social Security taxes on $176,100 and nothing on the remaining $823,900.
• Economic upheaval: An event like the COVID-19 pandemic leads to high unemployment rates, which in turn reduces the number of people paying Social Security payroll taxes into the system.

Current status of the funds

When the funds need cash, the SSA cashes in Treasury bonds. If the Social Security trust funds were to run out of Treasury bonds to cash, benefits would not stop. However, if Congress doesn't ensure something is done to shore up the program, retirement benefits will be cut by at least 19%.

Typical estimates show the OASI fund running out around 2033, while the DI fund is expected to be solvent through a 75-year long-range projection period, which extends to 2099. This is due, in part, to a drop in the number of DI enrollments.

In short, the Social Security trust funds hold the money paid into Social Security and help fund benefits for today's beneficiaries. If the fund runs out, benefits don't disappear, but they are reduced.

No doubt, you have your retirement planning mapped out and hope to receive all Social Security benefits due you. The good news is that this isn't the first time in U.S. history that Congress has dealt with trust fund shortages. Lawmakers cobbled together a solution at that time, which leads one to believe they may be able to do it again.

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