What are the Social Security trust funds, and how are they financed?
They provide cash benefits to the elderly and disabled as well as their spouses and dependents, and they are funded chiefly through payroll taxes.
There are two Social Security trust funds: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), though the two are often analyzed together as Old-Age, Survivors, and Disability Insurance (OASDI). The funds finance benefits for eligible retired and disabled workers and their spouses, dependents, and survivors. When revenue dedicated to financing the programs exceeds program expenses, the surplus is credited to their respective trust funds, which invest in special interest-bearing Treasury bonds. When program costs exceed receipts, the Social Security Administration can redeem its bonds to cover expenses, until it runs out of bonds. The US Treasury pays its obligation to the trust funds from general government funds (table 1).
Payroll Taxes: FICA and SECA
The Social Security trust funds are financed chiefly through payroll taxes on workers covered by the OASDI program. Employers and employees each contribute 5.3 percent of the employee’s taxable wages for OASI and 0.9 percent of the employee’s taxable wages for DI coverage as part of what are sometimes called Federal Insurance Contribution Act (FICA) taxes. Up to $127,200 in wages is subject to FICA taxes, a threshold that is updated for average wage growth each year. (A portion of FICA taxes dedicated to the separate Medicare hospital insurance trust fund is not subject to this wage cap.) Because the employer portion represents the cost of hiring workers, economists believe that this tax is passed on to workers in the form of lower compensation. Thus workers effectively bear the entire tax.
Self-employed workers covered by Social Security contribute both the employer and employee portions of the tax under the Self-Employment Contribution Act (SECA) but are allowed to deduct the employer portion from their federal taxable income, just as other employers and employees can deduct or exclude employer FICA contributions from their taxable income.
Other Financing Sources
Social Security benefits are partially taxable for beneficiaries whose incomes exceed a threshold. The revenues are remitted to the OASI, DI, and hospital insurance (HI) trust funds. The trust fund balances also earn interest from the special interest-bearing Treasury bonds. Congress sometimes adds to the trust funds directly from general funds. For example, when the payroll tax was cut temporarily as a stimulus measure in 2011 and 2012, the trust funds were reimbursed for the lost revenue.
Trust Fund Solvency and Government-Wide Deficits
Both the OASI and DI trust funds face shortfalls as benefits currently exceed taxes paid in each; in the near future, benefits from the combined OASDI trust fund will exceed revenues, including interest payments from the Treasury. Considered separately, Social Security’s actuaries projected in the 2016 Trustees’ Report that the DI trust fund will be exhausted by 2023 and the OASI trust fund will be exhausted by 2035. If either event occurs, the Social Security Administration will only be able to pay a portion of benefits from payroll taxes collected, about three-quarters of promised benefits in the case of Social Security.
When the DI fund came close to depletion in 1994, Congress diverted some of the OASI fund’s payroll tax receipts to the DI fund to maintain its solvency. Legislators took this step again in 2015, transferring funds from the OASI trust fund to the DI trust fund to keep the DI fund solvent through 2023.
To restore long-term trust fund solvency, policymakers will have to make changes to the program through some combination of raising the payroll tax rate, reducing benefits, and tapping other sources of revenue. To avoid the effect of the ever-growing deficit of benefits relative to taxes already occurring, which add to the unified government deficits, policymakers need to act soon. The sooner policymakers make adjustments, the less dramatic those adjustments will need to be.
Social Security Administration. Annual Statistical Supplement to the Social Security Bulletin, 2015. Table 4.A1. “Old-Age and Survivors Insurance, 1937–2013” and Table 4.A2. “Disability Insurance, 1957–2013.”
Social Security Administration. 2016. 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC: Social Security Administration.