Social Security: The Trust Fund

Publication Date: August 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

The Social Security program is financed primarily through taxes, which are deposited in the U.S. Treasury and credited to the Social Security trust fund. Any revenues credited to the trust fund in excess of the costs (benefit payments and administrative costs) are invested in special U.S. obligations (debt instruments of the U.S. government).

The Social Security trust fund represents funds dedicated to pay current and future Social Security benefits. However, it is useful to view the trust fund in two ways: (1) as the balance of an internal federal accounting concept, and (2) as the accumulated holdings of the Social Security program.

For internal accounting purposes, certain accounts within the U.S. Treasury are designated by law as trust funds in order to properly track revenues dedicated to certain purposes (or expenditures). There are a number of trust funds in the U.S. Treasury including those for Social Security, Medicare, unemployment compensation, and federal employee retirement. The monies in the Social Security trust fund in the U.S. Treasury are owned by the U.S. government, which can (by changing the law) raise or lower revenues to the trust fund, or payments from the trust fund.

By law, any positive annual balance (or cash flow surplus) in the Social Security trust fund must be invested in U.S. government obligations. The accumulated holdings of U.S. obligations are often viewed as being similar to assets held by any other trust on behalf of the beneficiaries. However, the holdings of the Social Security trust fund differ from those of private trusts because: (1) the types of investments it may hold are limited; and (2) the U.S. government is both the buyer and seller of the investments.

This paper will review some of the basics of how the Social Security program is funded, and how the Social Security trust fund works. This report will be updated as needed to reflect legislative or other activity.