The Social Security Trust Fund is an account administered by the U.S. Treasury Department that levies Social Security payroll taxes on the part of employees and their employers and pays benefits to Social Security recipients.
Key can be taken away
- The Social Security Trust Fund receives payroll taxes, makes payments and invests any surplus in special government securities. These securities earn interest and are backed in full faith and credit by the U.S. government. The trust fund is expected to shut down the surplus in 2020, when it is likely to have to gradually deduct its reserves to pay benefits. The 2019 Social Security Trustee Report shows that pension / survivors ’and disability funds will run out in 2035, one year after last year’s estimate.
How does a social security trust fund work?
The Social Security Trust Fund consists of two separate funds: the Old Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (OASDI) Trust Fund. The OASI Trust Fund pays benefits to retired employees and their families, as well as to the families of deceased employees. The DI Trust Fund covers benefits provided to employees with disabilities and their families. Otherwise, the two funds work similarly.
When workers and employers pay more money into the Social Security system than they need to, these “extra” contributions are invested in special U.S. government securities. This allows the federal government to borrow from a trust fund for purposes other than social security.
The social security trust fund has no direct relationship with the stock market. On a daily basis, the funds remaining after all benefits have been paid are invested in specially issued government bonds. These are similar to U.S. government bonds, except that they do not participate publicly. These interest-bearing bonds are a form of IOU that must be paid out of future FICA tax revenue.
There are two types of special government securities: short-term debt securities, which expire on June 30, and bonds, which generally have a maturity of between one and fifteen years. None of these securities are traded on the bond market or to the public. Like other treasury securities, these are covered by the U.S. government with full credit and credit.
The interest rate on special issues is determined by a formula established in 1960 by amending the Social Security Act. This is roughly equal to the average yield on marketable treasury bills, which is at least four years from maturity. From mid-2019, trust funds earned an average interest rate of 2.845% on their securities.
From 2020 onwards, social security may need to be immersed in reserves to cover the liabilities of beneficiaries.
Today’s social security finances
The 2019 Annual Report on Trust Funds presented the basic facts about your finances:
- OASDI’s trust funds had $ 2.899 billion at the end of 2018 – 273% of the estimated cost by 2019. Expenditures in 2018 totaled $ 1,000,000 trillion and total revenue was $ 1,0034 trillion. Last year, the depletion date was estimated to be 2034. The performance dates differ for the two funds: OASI’s trust funds are estimated to operate in 2034 and DI reserves in 2052. Last year’s DI reserves are estimated to run in 2032. The reason for the difference, trustees say, is “DI applications and benefit fees, all of which fell well short of the level projected in last year’s 2018 report.” When OASI’s trust funds are depleted in 2034, only 77% of social security benefits will be able to be paid into the OASI Trust Fund on the basis of “pay as you go” income. income to the DI trust fund In the 75-year forecast period, the actuarial deficit was 2.78% of taxable wages (down from 2.84% in the previous year). In other words, social security taxes will have to be increased by 2.78% in order to solve the problem once and for all.
Note that the figures are slightly better than last year’s report, but by no means a sign that the problems are over. The demographics – the huge baby boom generation and the much smaller Gen X generation – show that no matter how good the economy is.
The future of the social security trust fund
Social security is a “pay as you go” system in which current employees pay taxes on benefits paid by retired employees and others. For many years, the income from social security from payroll taxes was more than enough to cover the benefits paid. Over time, the Social Security Trust Fund accumulated reserves that stood at nearly $ 2.9 trillion at the end of 2018.
However, this will change. Social security agents plan that from 2020 onwards, payroll tax will not cover 100% of the plan’s benefit obligations, so it will have to go into a reserve each year to cover part of it. According to current estimates, this means that the trust fund will be depleted by 2035 unless Congress takes steps to address the problem
