What are Social Security Trust Funds?
Social Security trust funds are financial accounts that exist in the U.S. Treasury. There are two different types of these accounts: one that pays for survivor benefits and retirement benefits and another that helps pay for disability benefits. Money is deposited in these funds and paid out of them. These trust funds hold money that is not used for Social Security benefits in the current year, as well as other administrative costs, so it’s invested in special Treasury bonds that the U.S. government will guarantee.
How Do The Social Security Trust Funds Work?
The operations expenses for Social Security are handled by the trust funds. Social Security payroll taxes and income are deposited into these funds, and then paid out from the funds. The program can often be described as a pay-as-you-go option, which is funded by the payroll taxes that are collected from workers.
For 30 years, there was a surplus that was collected from the payroll taxes, so the Treasury Department invested that surplus in securities that received interest. This year, Social Security started redeeming the reserve it got from the interest to help pay for some of the benefits. These reserves help make up the difference between income and costs until the reserves are depleted.
The trust funds were invested with U.S. Treasury securities that included bills, notes, and bonds. These funds are guaranteed by the U.S. government, and since the U.S. government hasn’t defaulted on its obligations, it’s one of the safest investments to make. At the end of 2017, there were about $2.9 trillion of securities and the average interest rate was 3.2%.
How are the Trust Funds Different?
Even though these two funds are distinct and pay for different benefits, together they are often referred to as the Social Security Trust Fund. One pays for disability and the other pays retirement and survivor benefits.
Social Security trust funds are different from other trust funds, because in the private sector these funds are invested in real assets that can range from stocks to bonds or other financial tools. The Social Security funds are invested in a special type of Treasury bond that can only be redeemed by the Social Security Administration. The government is basically creating an IOU from one of its accounts to another with this type of bond.
The Financial Status of the Trust Funds
Many worry about the future of Social Security in America. In 2018, the total costs have exceeded Social Security income. The trust funds are currently supplementing the program’s income, in order to pay for benefits until 2034. Benefits are not supposed to stop once Social Security runs out of funds. Instead, if nothing else is done, it would still pay three-fourths the promised benefits using the tax income it gets yearly.
It will be necessary for the government to address the shortfall and determine whether it’s necessary to increase income, reduce the benefits, or a combination of both. If the government acts sooner, it gives workers enough time and notice to make changes to the plan.