Social Security Trust Fund

Based on Wikipedia: Social Security Trust Fund

The $2.9 Trillion IOU

Here's a riddle that has puzzled economists, enraged politicians, and confused ordinary Americans for decades: Where is the Social Security Trust Fund?

The answer is simultaneously reassuring and unsettling. The fund exists—it contains nearly three trillion dollars. But if you went looking for a vault somewhere in Washington stuffed with cash or gold bars, you'd come up empty. Instead, you'd find a filing cabinet in Parkersburg, West Virginia, containing paper certificates. These certificates represent special government bonds, promises by the United States Treasury to pay back money it has borrowed.

Borrowed from whom? From you. From everyone who has ever paid payroll taxes.

How Social Security Actually Works

To understand the Trust Fund, you first need to understand a counterintuitive fact: Social Security is not a savings account. When you pay into Social Security, your money doesn't get deposited somewhere with your name on it, waiting for you to retire. Instead, it immediately goes out the door to pay benefits to current retirees.

This is called a "pay-as-you-go" system. Think of it as a conveyor belt. Today's workers put money on one end; today's retirees take money off the other end. The system works beautifully as long as enough money is going in to cover what's going out.

But what happens when more money comes in than goes out?

That's where the Trust Fund enters the picture. For decades—particularly after reforms in 1983—the system collected more in payroll taxes than it paid out in benefits. This surplus had to go somewhere. By law, it went into special Treasury bonds that earn interest and sit in the Trust Fund.

The Genius of Ida Mae Fuller

The very first person to receive a Social Security check was a woman named Ida Mae Fuller of Ludlow, Vermont. In 1940, she filed for benefits after working just three years under the new program. During those three years, she had paid a grand total of $24.75 in Social Security taxes.

Ida Mae lived to be one hundred years old. By the time she died, she had collected $22,889 in benefits. That works out to $925 for every dollar she ever paid in.

This was not a flaw in the system—it was a feature. Early participants in a pay-as-you-go system always get an extraordinary deal because they paid in for only a short time before becoming eligible for full benefits. Meanwhile, a massive generation of workers behind them was paying into the system to support them.

But this dynamic creates a problem. What happens when that massive generation of workers—say, the Baby Boomers—starts to retire?

The Greenspan Fix

By the early 1980s, alarm bells were ringing. Social Security was heading toward insolvency. The ratio of workers to retirees was shifting, and projections showed the program would soon be unable to pay full benefits.

President Reagan appointed a commission to solve the problem, headed by Alan Greenspan. At the time, Greenspan was a respected economist but not yet the legendary Federal Reserve Chairman he would later become. The commission's solution was elegant in its simplicity: raise taxes now, build up a surplus, and use that surplus to cover the gap when the Baby Boomers retired.

The changes signed into law in 1983 did exactly that. Payroll tax rates went up. The retirement age began a gradual climb toward sixty-seven. And the Trust Fund began to swell.

By the end of 2010, the accumulated surplus stood at over $2.6 trillion. By 2021, it had grown to $2.9 trillion.

The Money That Isn't There

Here's where things get philosophically interesting. That $2.9 trillion? It's been spent.

Every dollar of surplus that Social Security collected went to the U.S. Treasury. The Treasury handed back special bonds—essentially government IOUs—and then spent the cash on aircraft carriers, highway projects, Medicare, interest payments on other debt, and all the other things the federal government spends money on.

This arrangement troubles some people deeply and strikes others as perfectly sensible.

The critics point out that the Trust Fund is a bit like this: Imagine you have a jar where you save money for your child's college education. Every month, you put in a hundred dollars. But you also raid the jar constantly to pay for groceries and car repairs, leaving behind little slips of paper that say "IOU $100." At the end of eighteen years, the jar is full of paper, but there's no actual money. When tuition comes due, you'll have to find the cash somewhere else.

The defenders counter that this analogy misses something crucial. Government bonds aren't like personal IOUs. They're backed by the "full faith and credit of the United States"—the same promise that backs every Treasury bill owned by banks, foreign governments, and your grandmother's savings bonds. When the Trust Fund needs to redeem these bonds, the government is legally obligated to pay up.

Former Representative Bill Archer put it colorfully: "If one believes that the trust fund assets are worthless, then Americans who have bought EE savings bonds should go home and burn them because they're worthless because the money has already been spent."

What "Full Faith and Credit" Actually Means

The phrase "full faith and credit" sounds grand, almost religious. But what does it mean in practice?

It means the United States government has staked its entire reputation—its ability to borrow money, conduct trade, and function as a nation—on the promise that it will repay its debts. Breaking this promise would be catastrophic. Interest rates would spike. The dollar's status as the world's reserve currency would be jeopardized. Financial markets would convulse.

No president can simply decide not to honor these bonds. No bureaucrat can wave them away. Only Congress could explicitly repudiate the debt held by the Trust Fund, and doing so would require passing legislation that effectively says: "Those promises we made to retirees? Never mind."

This is, to put it mildly, politically difficult. Older Americans vote in enormous numbers. Their financial security is not something politicians toy with lightly.

So the Trust Fund's assets are real in the sense that they represent legally enforceable claims on the U.S. Treasury. They are perhaps less real in the sense that paying those claims requires the government to either raise taxes, cut other spending, or borrow more money from someone else.

The Clock Is Ticking

For decades, Social Security collected more than it spent. The surplus grew. But demographics are relentless.

In 2010, something changed. For the first time since 1983, the program's non-interest income—primarily payroll taxes—fell below the cost of benefits. The system still ran an overall surplus for a while because the Trust Fund earned interest on its bonds. But the trend line was clear.

According to the most recent projections from the program's trustees, the Old-Age and Survivors Insurance Trust Fund will be depleted by 2033. The Disability Insurance Trust Fund is in better shape, projected to last until 2098. Combined, the funds can pay full benefits until around 2035.

After that? The math becomes unforgiving.

Once the Trust Fund is exhausted, Social Security can only pay out what it takes in. Current projections suggest payroll taxes would cover about eighty-three percent of promised benefits. Without changes to the law, beneficiaries would face an automatic seventeen percent cut.

Why Hasn't Congress Fixed This?

The problem has been known for decades. In a 2006 survey of over two hundred economists, eighty-five percent agreed that Social Security's gap between income and obligations would become "unsustainably large" within fifty years if nothing changed.

And yet, remarkably little has changed.

The solutions are straightforward, at least mechanically. You can raise taxes—increase the payroll tax rate, raise the cap on taxable income, or find other revenue sources. You can cut benefits—reduce monthly payments, raise the retirement age, or means-test benefits so wealthy retirees get less. You can try to get more bang for your buck by investing the Trust Fund in higher-return assets like stocks instead of low-yield government bonds.

Each of these options has been proposed. None has been enacted.

The reason is politics. Raising taxes is unpopular. Cutting benefits for current or near-retirees is even more unpopular. And investing in stocks feels risky—do we really want the retirement security of millions to depend on the vagaries of the stock market?

So the can gets kicked down the road. Every year, the trustees issue their report. Every year, newspapers write articles about the looming shortfall. Every year, Congress does approximately nothing.

The Peculiar Accounting of Government Debt

The Social Security Trust Fund occupies an unusual position in federal finances. The bonds it holds are classified as "intragovernmental debt"—money the government owes to itself. This is distinct from "public debt," which is money the government owes to outside investors like banks, foreign governments, and individuals.

As of late 2022, the total national debt was about $31.4 trillion. Of that, roughly $6.2 trillion was intragovernmental debt—money owed by one part of the government to another. About $2.7 trillion of that was owed specifically to Social Security.

This creates a genuine puzzle for economists and policy analysts. Is intragovernmental debt "real" debt? In one sense, no—it's just the government moving money from one pocket to another. In another sense, absolutely yes—those are legal obligations that will need to be met with real money when the time comes.

The trust funds are also designated as "off-budget," meaning they're supposed to be treated separately from the rest of federal spending. This designation was codified in 1990 as part of the Balanced Budget and Emergency Deficit Control Act. The idea was to protect Social Security from being raided to balance the general budget.

Whether this protection has worked is debatable. The surplus still got spent. The Trust Fund still holds IOUs instead of cash. The accounting fiction may have made the overall budget look better than it really was.

Who Runs This Thing?

The Trust Funds are overseen by a Board of Trustees with six members. Four are cabinet officials who serve by virtue of their jobs: the Secretary of the Treasury (who serves as the Managing Trustee), the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two are public trustees appointed by the President and confirmed by the Senate.

In a nice bit of enforced bipartisanship, the two public trustees cannot be from the same political party. Their terms last four years, though they can continue serving after their term expires until a successor takes office or the board issues its next annual report to Congress.

The actual investing of the funds is handled by the Bureau of the Fiscal Service within the Treasury Department. Their job is remarkably boring, at least by design. They buy special Treasury bonds. They hold them. They earn interest. That's it. No hedge fund strategies, no venture capital plays, no cryptocurrency speculation.

A Tale of Two Trust Funds

When people talk about "the" Social Security Trust Fund, they're actually talking about two separate funds with different trajectories.

The larger one, the Old-Age and Survivors Insurance Trust Fund, pays retirement and survivor benefits. This is what most people think of as Social Security. It's the one facing the 2033 depletion date.

The smaller one, the Disability Insurance Trust Fund, pays benefits to workers who become disabled before reaching retirement age. This fund had its own crisis in 2015, when it came within about a year of depletion. Congress shifted some payroll tax revenue from the retirement fund to the disability fund, buying time. The disability fund is now projected to last until 2098—a remarkably distant horizon by Social Security standards.

By law, these funds can't borrow from each other without congressional action. When analysts project a combined depletion date of 2035, they're imagining a scenario where Congress allows the funds to be merged, which would let the healthier disability fund subsidize the strained retirement fund for a few extra years.

The Generational Bargain

At its heart, Social Security is a social contract between generations. Today's workers support today's retirees, trusting that tomorrow's workers will support them in turn.

This bargain has worked remarkably well for ninety years. The program lifted millions of elderly Americans out of poverty. It provided a basic floor of income security that private markets had failed to deliver. It became, as politicians are fond of saying, the most successful government program in American history.

But the bargain depends on demographics. When President Franklin Roosevelt signed Social Security into law in 1935, life expectancy was around sixty-one years, and the retirement age was set at sixty-five. Most people were expected to die before collecting much, if anything. Today, life expectancy is nearly eighty, and people routinely spend two or three decades in retirement.

Meanwhile, birth rates have fallen. The ratio of workers to retirees has shifted dramatically. In 1960, there were roughly five workers for every beneficiary. Today, there are fewer than three. By 2035, there may be only two.

The math does not lie. Either workers will have to pay more, or retirees will have to accept less, or both.

What Happens If Nothing Changes?

Let's imagine it's 2035. Congress has failed to act. The Trust Fund has been exhausted. What happens next?

Under current law, Social Security would continue to pay benefits—but only at the level that incoming payroll taxes could support. With taxes covering about eighty-three percent of promised benefits, checks would be cut by roughly seventeen percent across the board.

For a retiree receiving $2,000 per month, that's a $340 cut. For someone depending on Social Security as their primary income, that's potentially devastating.

But here's an important caveat: this outcome is entirely a matter of political choice, not mathematical necessity. Congress could prevent the cuts by raising taxes. It could find money elsewhere in the budget. It could borrow more. The "crisis" is really a failure of political will, not a failure of the economy to generate sufficient resources.

The United States is, after all, an extraordinarily wealthy nation. We could afford to fully fund Social Security indefinitely if we chose to. The question is whether we will choose to, and how we will divide the costs.

The Boomers and Their Critics

This brings us back to the intergenerational tension that makes Social Security such a fraught topic. Books with titles like "How the Boomers Betrayed America" and "How the Boomers Stole Their Children's Future" reflect a genuine grievance among younger generations.

The argument goes something like this: The Baby Boomers voted for politicians who cut their taxes, ran up enormous debts, failed to address Social Security's long-term imbalance, and now expect their children and grandchildren to foot the bill. They got the benefits of the generous postwar welfare state without paying the full cost.

Defenders of the Boomers point out that the Greenspan reforms of 1983 did exactly what they were supposed to do: they raised taxes on the Boomers throughout their working lives to pre-fund their retirements. The Trust Fund accumulated trillions of dollars. It's not the Boomers' fault that politicians spent the surplus on other things.

Both sides have a point. The generational accounting is genuinely unfair in certain ways. Early participants in Social Security—like Ida Mae Fuller with her $925 return for every dollar paid—got fantastic deals that can never be replicated. Later participants will inevitably get worse deals, and the youngest workers may face the worst deals of all.

But blame is a poor guide to policy. Whatever injustices may have occurred in the past, the question now is what to do going forward. And that is a question about values as much as mathematics.

The Road Ahead

Every year, the Social Security Trustees release their annual report. Every year, they project when the Trust Fund will run out. The dates shift a little—sometimes better, sometimes worse—depending on economic conditions, birth rates, immigration, and a hundred other factors.

But the fundamental picture has been consistent for decades: at some point, probably in the 2030s, something will have to give.

The solutions proposed over the years include raising the retirement age (people are living longer, after all), increasing the payroll tax, lifting the cap on taxable income (currently around $160,000, meaning high earners pay a lower effective rate), reducing benefits for wealthy retirees, changing how cost-of-living adjustments are calculated, and investing part of the Trust Fund in higher-return assets.

None of these options is painless. All of them have passionate opponents. And so, year after year, the can continues down the road.

What seems most likely is that Congress will eventually act—probably at the last minute, as is its habit—with some combination of tax increases and benefit adjustments. The program will not be allowed to fail. It is too popular, too important, and too deeply embedded in American life.

But until that day comes, the Trust Fund will continue to do what it has always done: hold paper promises, earn interest, and slowly count down toward zero.