How Is the Social Security Trust Fund Invested?

The Social Security Trust Fund is an account managed by the United States Treasury that takes in Social Security payroll taxes from workers and their employers and pays out benefits to Social Security recipients. It invests in securities that are backed by the full faith and credit of the U.S. government.

What Is the Social Security Trust Fund?

The Social Security Trust Fund is used by the U.S. government to manage surplus contributions to the Social Security system. It is funded through a withholding tax that deducts a set percentage of pretax income from each paycheck. The fund is used when contributions made by workers and employers exceed the amount currently needed to fund the system to make benefits payments to retired workers and people with disabilities.

How the Social Security Trust Fund Works

The Social Security Trust Fund actually consists of two separate funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The OASI Trust Fund is used to pay benefits to retired workers and their families, as well as to the families of deceased workers. The DI Trust Fund covers benefits to disabled workers and their families. Otherwise, the two funds work similarly.

When workers and employers pay more money into the Social Security system than it needs to pay benefits, those “excess” contributions are invested in special U.S. government securities. That allows the federal government to borrow money from the trust fund to use for purposes other than Social Security.

Does the Social Security Trust Fund Earn Interest?

The Social Security Trust Fund has no direct connection to the stock market. On a daily basis, funds left over after payment of all benefits are invested in special-issue government bonds. They are similar to U.S. Treasury bonds, except that they don’t trade publicly. These interest-bearing bonds are a form of IOU to be paid from future Federal Insurance Contributions Act (FICA) tax receipts. 

The special government securities come in two types: short-term certificates of indebtedness—which mature on the following June 30—and bonds, which generally mature in one to 15 years. Neither of these securities is traded on the bond market or available to the public. Like other Treasury securities, however, they are backed by the full faith and credit of the U.S. government.

The interest rate on the special issues is set by a formula established in 1960 through amendments to the Social Security Act. It is roughly the same as the average yield on marketable Treasury securities that are at least four years from maturity. In 2020, the trust funds earned an average interest rate of 0.990% on their securities compared to 2.219% in 2019. This rate, however, can vary from month to month. In 2020, it declined from 2% in January to a mere 0.625% in August, probably influenced by the economic downturn and COVID-19 pandemic lockdown. In October 2021, the rate stood at 1.5%.

Current Social Security Finances

The 2021 annual report from the Social Security and Medicare Boards of Trustees showed the following financial projections for the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.

Combined OASI and the Disability Trust Funds

The combined OASI and Disability Insurance (DI) Trust Funds had $2.908 trillion by year-end 2020.Total 2021 expenditures for the OASI and DI Trust Fund are expected to be $1.151 trillion, which is forecasted to exceed the total income of $1.074 trillion. Collectively, the OASI and DI Trust Fund reserves will be depleted by 2034.

The OASI Trust Fund

The retirement and survivor benefits under the OASI Trust Fund are estimated to run out in 2033. When the fund has been depleted, only 76% of retirement benefits will be able to be paid based on continuing tax income.

The Disability Insurance (DI) Trust Fund

The DI reserves are forecasted to last until 2057, after which, 91% of scheduled disability benefits will be able to be paid based on continuing tax income.

Demographics and Taxes

For the 75-year projection period, the actuarial deficit is 3.54% of taxable payroll (up from 3.21% the previous year). In other words, Social Security taxes would need to increase by 3.54% to fix the problem permanently.

The demographics show that the baby boom generation, which began collecting benefits, is much larger than the current working Gen X generation paying into the system. In other words, the finances may not significantly improve no matter how good the economy is performing.

Also, the report stated that the financial projections include their “best estimates” as to the impact of the COVID-19 pandemic and noted that the funds were significantly affected by the pandemic and the 2020 recession.

The Future of the Social Security Trust Fund

Social Security is a pay-as-you-go system, with taxes on current workers paying for the benefits owed to retired workers and others. For many years, the payroll tax income funding Social Security was more than sufficient to cover the benefits being paid out. Over time, the Social Security Trust Fund accumulated a reserve that, at the end of 2020, totaled over $2.9 trillion.

However, Social Security’s trustees projected that starting in 2021, payroll taxes will no longer cover 100% of the program’s benefit obligations, so it will need to dip into its reserves each year to cover a portion of them.

By the most recent estimates, that means that unless Congress takes action to address the problem, the combined asset reserves of the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund will be depleted by the year 2034.

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