Social Security taxes that workers and employers pay are credited to the Social Security trust funds. The trust funds are defined by law as a way to set aside money that is earmarked for Social Security. A Board of Trustees oversees the trust funds. It is made up of the Secretary of the Treasury, who is the managing trustee, the Secretaries of Labor and of Health and Human Services, the Commissioner of Social Security, and two public trustees from different political parties who are appointed by the President and confirmed by the Senate.
In 2012, the Social Security program received $840 billion in income and spent $786 billion for benefits and administrative costs, leaving a surplus of $54 billion in the trust funds. Total administrative costs amount to less than 1 percent of the funds collected each year.
What happens to the funds that are not used immediately to pay benefits? By law, the funds are invested in special-issue Treasury securities that earn interest. In effect, the funds are loaned to the Treasury, which borrows the money just as it borrows money when it sells Treasury securities to the public. In other words, the surplus money collected by Social Security helps pay for the rest of the government. In return for the funds it loans to the government, the trust funds receive Treasury securities bearing a market rate of interest. The average interest rate on the portfolio held by the Social Security trust fund was about 4.1 percent in 2012.
Because the federal government is spending the cash it borrows from Social Security, “some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future,” according to the Social Security Administration website. But, the agency states on its website, “Far from being ‘worthless IOUs,' the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. savings bonds or other financial instruments of the Federal government.”
For more information, see:
- Social Security Benefits, Finances, and Policy Options: A Primer
- Social Security Finances: Findings of the 2013 Trustees Report, Social Security Brief No. 42
- Short Answers to Common Questions about Social Security
- A Young Person's Guide to Social Security (see pages 28-29)
- Why Do We Have a Social Security Trustees Report? What Should We Make of It?, April 1, 2005 Policy Seminar
- The Role of the Chief Actuary of Social Security, Social Security Brief No. 17