Social Security trust funds are financial accounts that exist in the United States Treasury. There are two different types of these accounts: one that pays survivor benefits and retirement benefits, and one that helps pay disability benefits. Money is deposited into these funds and paid out by them. These trust funds hold money that is not used for Social Security benefits in the current year, as well as for other administrative costs, so it is invested in special treasury bills that the US government will guarantee.
How do social security trust funds work?
Social security operating expenses are managed by trust funds. Payroll taxes and Social Security income are deposited into these funds and then paid out of the funds. The program can often be described as a pay-as-you-go option, funded by payroll taxes collected from workers.
For 30 years, there was a surplus that was collected from payroll taxes, so the Treasury Department invested that surplus in securities that received interest. This year, Social Security began redeeming the interest reserve to help pay some of the benefits. These reserves help offset the difference between revenue and costs until the reserves are depleted.
Trust funds were invested with US Treasury securities that included bills, notes, and bonds. These funds are guaranteed by the US government and because the US government has not defaulted on its obligations, it is one of the safest investments you can make. At the end of 2017, there was around $2.9 trillion worth of securities and the average interest rate was 3.2%.
Eligibility
You do not automatically qualify for Social Security. Currently, the Social Security Administration has a couple of requirements.
For AHV, you must be at least 62 years old and have been in the system for 10 years or more to receive your social security check.
If you wait until 70, you get more (because you paid more).
In addition, both spouses and ex-spouses can receive funds based on the previous income of the partner or ex-partner.
If a retiree has an adult child, the child is also eligible for benefits up to age 16 and older if disabled.
Amount of benefits
The amount of money you receive depends on a couple of factors.
If you choose to retire early, at age 62, you won’t get much.
If you wait until you’re fully retired, which the government defines as age 67, you’ll get more.
If you wait until after you’ve celebrated your 70th birthday, you’ll get even more. However, don’t delay. Benefits don’t increase after age 70, so you’d be wise to sign up for benefits as soon as you blow out those 70 candles.
You can see your potential earnings by checking the retirement calculator on the Social Security Administration website.
Ultimately, earnings depend on how much a worker earned during their 35+ years of earnings.
Disability benefits
If you are disabled and unable to work due to a physical or mental disability for a year or more, you may be eligible for social security benefits under the DI Trust Fund. Also, members of your family may qualify.
Survivor Benefits
The following survivors are also entitled to social benefits:
- If one of the parents dies before reaching the age of 18
- If a spouse dies when you are 60 or older
- If a spouse dies when you are age 50 or older and disabled
- If your spouse dies and you are caring for a child under the age of 16 or a disabled child
Under specific circumstances, both surviving spouses and children are eligible for a one-time payment of $255 upon the death of an eligible worker.
How are trust funds different?
Although these two funds are distinct and pay different benefits, together they are often referred to as the Social Security Trust Fund. One pays disability and the other pays pension and survivors.
Social security trust funds are different from other trust funds because in the private sector these funds are invested in real assets that can range from stocks to bonds or other financial instruments. Social Security funds are invested in a special type of Treasury bill that can only be redeemed by the Social Security Administration. The government is basically creating a promissory note from one of your accounts to the other with this type of bond.
What is the Social Security Trust Fund Loan?
Some critics will argue that the government is stealing from the trust fund. In truth, the Social Security Administration has lent and lends money to the federal government from the Social Security Trust Fund.
The Social Security Administration lends money from your surplus. So when the government has a deficit and the Social Security Trust has a surplus, the Social Security Administration lends its surplus to the government and the government pays it back with interest.
Imagine a large cash box with multiple dividers. The federal government would still have to borrow money, so why not just borrow from the side of the chest that contains money when its section is empty?
Some experts compare Social Security trust fund loans to what a bank does with money when an investor deposits funds there. The bank is not limited to money. He invests it.
Also, the Social Security Administration invests the surplus to help the Trust Fund grow even more.
It’s worth noting that the Social Security Administration doesn’t lend money first. It ensures that you can meet your financial obligations to those who are going to receive social security benefits.
How the Social Security Fund is financed
When FDR instituted the Social Security Act, the Trust was originally funded through FICA, the Federal Insurance Contributions Act, also known as the payroll tax.
Payroll tax
When the Social Security Act was passed, the federal government immediately began funding it through the payroll tax, a tax that is automatically deducted from your paycheck.
This tax was finally raised in the 1980s when the Social Security Trust almost hit rock bottom. If there is excess funds, it goes into the trust fund which is designed to help offset future needs.
So when you see the 12.4 percent payroll tax deducted from your paycheck, you’ll know you’re among those with income up to $128,400 affected by this tax.
Interest income
The fund is also financed with the interest it generates. Interest is the second largest contributor to the fund after payroll tax.
From 1983 to 2017, Social Security received more income than it paid out. He had a surplus. This resulted in a $2.9 trillion cash reserve that continued to earn interest.
In 2017, interest income generated $85.1 billion for the OASDI Trust.
Taxation of profits
After the fund was virtually empty in 1983, Congress enacted the SS reform. This reform included a tax on half of the beneficiary’s payment if the beneficiary’s gross income plus half of the benefits was more than $25,000 for a single beneficiary and $32,000 for couples filing jointly.
In 1993, Congress added a second tier that allows 85 percent of Social Security benefits to be tax-qualified for individuals earning $34,000 with benefits and $44,000 for couples.
What happens to the surplus?
The Social Security Administration invests excess money received in US Treasury bonds. These are securities that the US government stands behind with full confidence and trust.
Historically, the United States government has never failed in its obligations. In addition, international investors consider US government bonds to be among the safest investments in the world.
These changes to the social security system and the Social Security Trust Fund have allowed the fund to grow and thus support our seniors, keeping them from living in poverty.
The financial situation of trust funds
Many are concerned about the future of social security in the United States. In 2018, the total costs exceeded the income of social security. Trust funds currently supplement program income to pay benefits through 2034. Benefits are not expected to stop once Social Security runs out of funds. Instead, if nothing else is done, it would still pay three-fourths of the promised benefits using the tax revenue it earns annually.
The government will need to address the shortfall and determine whether revenue needs to be increased, benefits reduced, or a combination of the two. If the government takes action sooner, it gives workers enough time and notice to make changes to the plan.