Social Security: Where Do Surplus Taxes Go and How Are They Used?

Publication Date: September 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance; Labor

Type:

Abstract:

Most of the costs of the Social Security program are financed by the payroll taxes workers pay on their wages and self-employment income. A smaller amount is financed by part of the income tax some recipients pay on their Social Security benefits. These taxes are paid to the federal government and, along with other forms of revenue, become part of the government's operating cash pool, commonly referred to as the U.S. treasury. Once received, they become indistinguishable from other monies received by the government. The trust funds receive credit for these monies in the form of federal securities issued to the Social Security trust funds. When more Social Security taxes are received than spent, the extra money is not held in the trust funds, but remains in the treasury. Instead, the "surplus" receipts are credited to the Social Security program by increasing the amount of securities posted to the Social Security trust funds.

Similarly, benefits are not paid from the trust funds, but from the treasury, and as with Social Security receipts, the money used is indistinguishable from that used to make other government expenditures. The treasury simply uses whatever funds it has on hand. As the checks are paid, the payments are reflected by deducting an equivalent amount of federal securities from the trust funds.

Generally speaking, the federal securities issued to any federal trust fund represent "permission to spend." As long as a trust fund has a balance of such securities, the Treasury Department has legal authority to keep issuing checks for the program. In a sense, the mechanics of a federal trust fund are similar to those of a bank account. The bank takes in a depositor's money, credits the amount to the depositor's account, and then lends it out. As long as the account shows a balance, the depositor can write checks that the bank must honor. The trust fund balances, like those of a bank account, represent a form of IOU, a promise that, when money is needed to pay Social Security benefits, the government will obtain resources equal to the value of the securities. The surplus taxes themselves are commingled with all other sources of government revenue and used for any of the many functions of government.