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Updated June 23, 2022
Social Security Trust Fund Investment Practices
Background
Social Security is a self-financing program that provides
monthly cash benefits to retired or disabled workers, and to
the eligible family members of retired, disabled, or
deceased workers. There are over 65 million beneficiaries
in 2022.
Workers gain benefit eligibility for themselves and their
family members by working in jobs covered by Social
Security, among other requirements. An estimated 178
million workers (94% of all workers in 2022) are covered
by Social Security. Covered workers and their employers
must pay Social Security payroll taxes, which are the
program's primary source of income. The program also
receives income from the federal income taxes that some
beneficiaries pay on a portion of their benefits. Together,
these dedicated tax revenues represent 93.6% of Social
Security's total income.
Social Security operates with a trust fund financing
mechanism. The Social Security trust funds are accounts
within the U.S. Treasury that (1) track income and
expenditures for the program and (2) hold the accumulated
assets 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 by law, Social Security tax revenues are
invested in interest-bearing U.S. government obligations.
Currently, the trust funds hold about $2.9 trillion in U.S.
Treasury securities. In 2021, the trust fund holdings earned
approximately $70 billion in interest, representing 6.4% of
Social Security's total income.
In the past, attention has 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 of the Treasury) to invest Social
Security tax revenues in special nonmarketable federal
public-debt obligations called special issues (i.e., securities
available only to the trust funds, not to the general public).
The Secretary may invest in marketable federal securities,
which are available to the general public, if that is
determined to be in the public interest.
The Social Security tax revenues that are exchanged for the
U.S. government obligations go into the general fund of the
U.S. Treasury, and they are indistinguishable from all other
revenues in the general fund. Social Security benefits and
administrative expenses are also paid from the general fund
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 from the Social
Security trust funds.
Key Points
Social Security is a self-financing program, with 93.6% of its
total 2021 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 2021-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 2021 was 2.5%; the average interest rate
on new special issues was 1.4%.
The trust funds earned approximately $70 billion in interest
in 2021, representing 6.4% of Social Security's total income.
The holdings of the Social Security trust funds represent the
amount of money that the U.S. Treasury's general fund
owes to the Social Security trust funds. There is no separate
pool of cash set aside for Social Security purposes.
However, that is not to say that the holdings of the Social
Security trust funds are not real assets. 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, the holdings of the Social Security trust
funds (the asset reserves) represent the accumulated total of
surplus Social Security tax revenues collected for the
program over the years, plus the interest earned on
securities held by the trust funds. Over its 87-year history,
the program has collected $25.2 trillion and paid out $22.3
trillion, leaving trust fund reserves of about $2.9 trillion
available for future program spending. As long as the trust
funds have a sufficient balance, they represent the authority
and an obligation for the U.S. Treasury to issue benefit
payments scheduled under current law.
Since 2010, Social Security has relied on trust fund reserves
to supplement current tax revenues to pay benefits
scheduled under current law. Those reserves are projected
to be depleted in 2035 (the 2022 intermediate assumptions
reflect the Board of Trustees' understanding of Social
Security at the start of 2022). Following depletion of trust](ViewImageLocal?handle=hein.crs/goveikd0001&div=1&collection=&method=preview&ext=.png&size=3)