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Updated September 2,2021
Social Security Trust Fund Investment Practices
Background
Social Security is a self-financing programthat provides
monthly cash benefits to retired or disabled workers, and to
the eligible family members ofretired, disabled, or
deceased workers. There are about65 million beneficiaries
in 2021.
Workers gain benefit eligibility for themselves andtheir
family members by working in jobs covered by Social
Security, among other requirements. An estimated 176
million workers (94% of all workers in 2021) are covered
by SocialSecurity. Covered workers andtheiremployers
must pay Social Security payrolltaxes, which are the
program's primary source of income. The programalso
receives income fromthe federal income taxes that some
beneficiaries pay on a portion oftheirbenefits. Together,
these dedicated taxrevenues represent 93.2% of Social
Security's totalincome.
Social Security operates with atrustfundfinancing
mechanism. The Social Security trustfunds are accounts
within the U.S. Treasury that (1) trackincome and
expenditures forthe programand (2)hold the accumulated
as sets for the program. As such, they represent funds
dedicated to pay current and future Social Security benefits.
(There are two separate trust funds: the Old-Age and
Survivors Insurance [OASI] Trust Fund and the Disability
Insurance [DI] Trust Fund. They are referred to here on a
combined basis as the Social Security trust funds.)
As required bylaw, Social Security taxrevenues are
invested in interest-bearing U.S. government obligations.
Currently, the trust funds hold about $2.9 trillion in U.S.
Treasury securities. In 2020, the trust fund holdings earned
approximately $76 billion in interest, representing 6.8% of
Social Security's total income.
In the past, attentionhas focused on alternative investment
practices in an effort to increase the interest earnings of the
trust funds, among other goals. This In Focus explains
current Social Security trust fund investment practices.
The Trust Funds
Section 201 of the Social Security Act (42 U.S.C. 401)
requires the managing trustee of the Social Security trust
funds (the Secretary ofthe Treasury) to invest Social
Security taxrevenues in specialnonmarketable federal
public-debt obligations called specialissues (i.e., securities
available only to the trustfunds, not to the general public).
The Secretary may invest in marketable federal securities,
which are available to the generalpublic, if that is
determined to be in the public interest.
The Social Security taxrevenues that are exchanged for the
U.S. governmentobligations gointo thegeneralfundofthe
U.S. Treasury, andthey are indistinguishable fromall other
revenues in the general fund. Social Security benefits and
administrative expenses are also paid fromthe generalfund
of the U.S. Treasury. When Social Security payments are
made from the general fund, an equal amount of U.S.
government obligations are redeemed fromthe Social
Security trust funds.
Key Points
* Social Security is a self-financing program, with 93.2% of its
total 2020 income from dedicated tax revenues.
* Social Security tax revenues are invested in interest-bearing
U.S. government obligations held by the Social Security
trust funds, as required by law.
* Trust fund holdings-about $2.9 trillion in U.S. Treasury
securities in 2020-represent funds dedicated to pay
current and future Social Security benefits.
* The effective interest rate earned on all obligations held by
the trust funds in 2020 was 2.6%; the average interest rate
on new special issues was 1.0%.
* The trust funds earned approximately $76 billion in interest
in 2020, representing 6.8% of Social Security's total income.
The holdings of the Social Security trust funds represent the
amount of money thatthe U.S. Treasury's generalfund
owes to the Social Security trust funds. There is no separate
pool of cash set aside for Social Security purposes.
However, that is notto say that theholdings of the Social
Security trustfunds are not real as sets. The U.S.
government obligations purchased by the trust funds are
backed by the full faith and credit of the United States and
guaranteed with respect to both principal and interest by the
United States, as specified in Section 201(d) of the Social
Security Act (42 U.S.C. 401[d]).
Stated another way, theholdings of the SocialSecurity trust
funds (the as set reserves) represent the accumulated total of
surplus Social Security taxrevenues collected for the
programover the years, plus the interest earned on
securities held by the trustfunds. Over its 86-yearhistory,
the programhas collected $24.1 trillion and paid out $21.2
trillion, leaving trust fund reserves of about $2.9 trillion
available for future programspending. As long as the trust
funds have a sufficient balance, they represent the authority
and an obligationfor the U.S. Treasury to is sue benefit
payments scheduled undercurrentlaw.
Since 2010, Social Security has relied on trust fund reserves
to supplement current taxrevenues to p ay benefits
scheduled under current law. Those reserves are projected
to be depleted in 2034 (the 2021 intermediate as sumptions
reflect the Board ofTrustees' understandingofSocial](ViewImageLocal?handle=hein.crs/govegxl0001&div=1&collection=&method=preview&ext=.png&size=3)