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 simple 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 in 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 April, probably influenced by the economic downturn caused by the COVID-19 pandemic. In June 2021, the rate stood at 1.5%.

Today’s Social Security Finances

The 2020 annual report on the trust funds showed these basic facts about its finances:

• The OASI trust funds had $2.897 trillion at the end of 2019—261% of the estimated cost for 2020.
• Total expenditures for 2019 were $1.0593 trillion, and total income was $1.0618 trillion.
• Collectively, OASI trust fund reserves will be depleted by 2035.
• Depletion dates are different for the two funds: OASI trust funds are estimated to run out in 2034, while DI reserves can last until 2065.
• When OASI trust funds are depleted, only 76% of Social Security benefits will be able to be paid based on the “pay as you go” income to the OASI trust fund.
• When DI funds are depleted, if there is no fix in time, 92% of disability benefits will be able to be paid based on the “pay as you go” income to the DI trust fund.
• For the 75-year projection period, the actuarial deficit is 3.21% of taxable payroll (up from 2.78% the previous year). In other words, Social Security taxes would need to increase by 3.21% to fix the problem permanently.

The numbers are for the most part similar to the prior year’s report. Demographics—the huge baby boom generation and the much smaller Gen X one—mean that they won’t significantly improve no matter how good the economy is. Furthermore, the report states: “The projections and analysis in this report do not reflect the potential effects of the COVID-19 pandemic on the Social Security and Medicare programs. Given the uncertainty associated with these impacts, the Trustees believe that it is not possible to adjust their estimates accurately at this time.” Meaning that, if anything, they are likely to get worse.

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 income Social Security received from payroll taxes was more than sufficient to cover the benefits it was paying out. Over time, the Social Security Trust Fund accumulated a reserve that, at the end of 2019, totaled nearly $2.9 trillion.

That is about to change, 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 trust fund will be depleted by the year 2035 .