HOW DOES THE TRUST FUND SYSTEM WORK?

Social Security has always been a pay-as-you-go system: The payroll taxes of today’s workers pay the benefits of today’s recipients. Workers provide for their parents, just as their children will provide for them.

Payroll tax dollars come into a “trust fund” and immediately go out as benefit payments. For most of Social Security’s history, the amount left over has rarely been more than the equivalent of a year’s payout, which serves as a cushion in case of economic downturn.

In 1983, however, a bi-partisan commission recognized that the baby boom generation would place a heavy burden on Social Security and recommended a build-up in the Trust Fund reserve. As a result, there is currently $600 billion in reserve — an amount that will continue to grow until the baby boomers retire. Then, the reserve will be used to pay benefits until it is exhausted. The larger the build-up in the Trust Fund reserve, the longer it can pay benefits.

As noted previously, current projections show that the reserve will be empty in 2032, when Social Security will return to its traditional pay-as-you-go system. The payroll tax will then be sufficient to cover 75 percent of scheduled benefits.

By law, Trust Fund reserves have always been invested in federal government bonds, which earn interest for Social Security at market rates. These bonds are backed by “the full faith and credit” of the federal government and are essentially risk-free.

Who Benefits from
Social Security?

Is Social Security “Broke”?

How Does the Social Security Trust Fund Work?

How Will Social Security Pay Benefits in the Future?

What is Social Security Privitization?