The Social Security Trust Fund is actually a combination of two funds: the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. Although Social Security is known primarily as a retirement fund, it also disburses benefits for the blind and disabled. By 2011, one in seven Americans (50 million) received some kind of Social Security benefit. Nearly all (90%) workers paid Social Security taxes.
How Does the Fund Work?
The Trust Fund is managed by the Department of the Treasury, and overseen by a six-member Board. As payroll tax income comes into the Treasury each day, it is required by law to be invested in "securities guaranteed as to both principal and interest by the Federal government." This used to be ordinary, marketable Treasury notes whose value changed depending on demand in the secondary market. Therefore, Treasury created "special issue" securities that guarantee amount of the principal and interest no matter when they are redeemed, regardless of market conditions. Unlike Treasuries, they are only available to the trust funds. Benefits are paid out of the redemption of these "special issue" securities.The payroll tax income itself goes into the General Fund. For this reason, some critics say the "special issue" securities are "nothing more than IOUs." That's because future benefits will have to come from "taxes that are being used today to pay for other government programs."(Source: Heritage Foundation, Misleading the Public)
Why Is There a Surplus?
In 2010, the fund received $1.02 trillion in income, and disbursed $929 billion in benefits. There was a surplus for two important reasons: First, there were 2.9 workers for every beneficiary, so there was more income from payroll taxes. In addition, there's interest income from the "special issue" securities. The rate changes each month, and is determined by a formula enacted in 1960. The average rate for each month in 2010 was 2.76%. However, the average rate for all the money in the fund ($2.6 trillion) was higher, 4.642%, because the fund still holds bonds from past years when interest rates were higher.(Source: Social Security Administration, Fund FAQ)Is Social Security in Danger of Running Out?
For years, the Board of Trustees warned that demographic changes would deplete the surplus. As the post-WWII Baby Boomers started to retire and leave the workforce, there are fewer workers supporting more retirees. The financial crisis of 2008 has only hastened this trend -- higher unemployment means even lower payroll tax income. In fact, 2010 was the first year that Social Security income was not enough to cover benefits. The fund only received $637 billion from payroll taxes, but paid out $702 billion in benefits (and an additional $9 billion in administration and other fund costs). However, the Fund also took in $24 billion from taxing those benefits, and $119 billion from the interest on the "special issue" securities, and $2 billion in miscellaneous reimbursements. In other words, the fund only runs a surplus because of the interest paid -- which is essentially from other income sources from the Federal Government.The surplus itself will be depleted by 2036. At that time, Social Security income from taxes will only cover 77% of projected benefits. Over the next 75 years, the Fund is projected to need additional revenue of $6.5 trillion to pay all scheduled benefits. This translates to an extra 2.22% increase in payroll taxes.
(Source: SocialSecurityOnline, (Trust Fund FAQ)
What Can Be Done?
Different proposals are being developed to restore solvency. They require either a decrease in benefits paid, an increase in taxes or an increase in debt. Since the debt is already unsustainable, policy makers must choose between the remaining two, unpopular evils. As a result, no real changes to restore the solvency of the Social Security Trust Fund have been implemented.A six-member Board of Trustees oversees the financial operations of the trust funds. The Board reports annually to the Congress on the financial and actuarial status of the trust funds.
