Banking 101: What Is the Social Security Trust Fund?

Social Security was originally created in the 1930s to give workers a source of income once they reached retirement. Today, the program doesn’t just help retirees, but also provides financial benefits to disabled workers and the families of workers who’ve passed away.

Millions depend upon the financial benefits of Social Security. In May 2019, more than 68.5 million Americans received either Social Security, Supplemental Security Income (SSI) or both. According to the Social Security Administration, one in five Americans receives a Social Security benefit.

The funds that pay Social Security benefits are collected from payroll taxes on employees and employers. The money raised is placed in the Social Security trust fund maintained by the U.S. Treasury. Unfortunately, the Social Security trust fund is projected to be depleted by 2035 if no adjustments are made to how much is brought in from taxes or paid out as benefits.

Let’s take a look at how the Social Security trust fund works and how it was established in the first place. We’ll also cover what you can expect from Social Security once the program’s costs begin to exceed its income — projected to take place in 2020.

There is more than one Social Security trust fund

The benefits that today’s Social Security recipients receive are funded by payroll taxes. When Federal Insurance Contributions Act (FICA) taxes or self-employment taxes are withheld from your paycheck, a portion of those taxes are paid into two trust funds (conventionally, they are referred to together as “the Social Security trust fund):

• The Old-Age and Survivors Insurance (OASI) Trust Fund
• The Disability Insurance (DI) Trust Fund

Both trust funds are managed by the Department of the Treasury and overseen by a board of trustees.

Old-Age and Survivors Insurance Trust Fund

OASI first came into existence in 1940, not with the original passage of the Social Security Act itself in 1935, but rather when the law was amended in 1939. The OASI Trust Fund is responsible for paying monthly benefits to the following groups of eligible people:

• Retired workers, their spouses and children
• Survivors of insured workers who are deceased

Disability Insurance Trust Fund

The DI Trust Fund became effective in 1957 — nearly two decades after OASI. It was also created by an amendment to the Social Security Act. The DI Trust Fund is responsible for paying monthly benefits to the following groups of eligible people:

• Disabled workers
• The spouses and children of disabled workers

History of the Social Security trust fund

The Social Security Act was originally signed into law by President Roosevelt in 1935 as part of his now famous New Deal, designed to restore prosperity to the U.S. during the Great Depression.

Initially, the Social Security Act served retired workers and dependent children. The act also provided for unemployment insurance and medical care grants to the states. Other populations, however, would have to wait for future amendments to the Act to receive help.

How are Social Security funds invested?

When the Social Security trust fund collects more than is needed to pay benefits and administration fees, the law requires the surplus to be invested. Currently, the money is invested in “special issue” securities ,issued by the U.S. Treasury to the trust funds. These securities aren’t available to the public.

The special issue securities receive a lot of criticism. Some opponents go so far as to call them “worthless IOUs.” However, the Social Security program points out that the investments are “backed by the full faith and credit of the U.S. Government” — a government that has never failed to repay Social Security with interest.

Devin Carroll, author of “Social Security Basics” and founder of SocialSecurityIntellegence.com, says this mistrust of special issue securities is misplaced.

“There are plenty of people out there who don’t like this arrangement,” said Carroll. “They think that the funds should be paid and literally be segregated in a stand-alone account. However, when you look at the numbers, it’s a very good thing that the trust fund has these IOUs in it.”

When will the Social Security trust fund run out of money?

Analysts currently predict the Social Security trust fund will run out of money in 2035. But Carroll explains that the interest received on securities has helped to bolster the funds.

“At the end of 2017, reserves for Social Security retirement benefits was $2.9 trillion. When you dig into the source of this $2.9 trillion, it’s interesting to note that $1.9 trillion is from interest earned on those IOUs from the treasury,” said Carroll. This means that If we wouldn’t have used the current arrangement, and just left the money sitting there in the trust fund, Social Security would actually run out long before 2034.

Nonetheless, there is a shortfall on the horizon — one that’s too big for the trust funds to sustain in the long term. That’s the bad news. The good news is that experts say there’s no reason to panic.

“Here's why the sky isn't falling: The Social Security Trust Fund is projected to become depleted in less than two decades, but that is not the only, or even the main source of funds for Social Security benefits,” said Emily Guy Birken, author of “Making Social Security Work for You.” “Once the trust fund is gone, each year's tax revenue is projected to pay for approximately 75% of the benefits that are currently promised. While 75% of a promise is hardly worth cheering for, it's still far better than nothing.”

A call for action on the Social Security trust fund

Although the Social Security trust fund has never been depleted in the past, in 1982, the nation experienced a very close call. At the time, Congress had to enact emergency legislation that let the fund borrow from other government trust funds. Later, those funds were repaid plus interest and President Reagan signed into law the Social Security Amendments of 1983 — legislation that strengthened the trust fund with higher taxes, among a number of other provisions.

Now, the country again faces the potential emptying of the Social Security trust funds. According to Guy Birken, we still have time to avert this projected shortfall, provided Congress is willing to act before then.

“There have been tweaks and changes to Social Security throughout its more than 85-year history for this very reason — to prepare for coming demographic changes that will affect benefits and beneficiaries,” she said.

The Social Security board of trustees is urging lawmakers to act now, before the trust fund gets anywhere close to depletion and while more potential solutions to the problem still remain available.

The final word on the Social Security trust fund

There’s no need to worry right now about the availability of Social Security, or a potential reduction in payments when you retire. However, it’s a good idea to plan for your retirement in other ways. This advice would be true whether the Social Security funds were projected to be depleted or not.

Social Security wasn’t designed to be your sole source of income once you retire. Guy Birken explains that in 2019, the average Social Security benefit is just $1,461 per month for an individual or $2,448 for a couple. That’s “barely enough to live on in most areas of the country — and that’s before you even factor in the potential for poor health in retirement,” she said.

As for the impending depletion of the trust fund, it should inspire you to get proactive about boosting your retirement savings.