Social Security Trust Funds, FAQ's (Soc Sec Administration)

What are the Social Security Trust Funds?

The Social Security Trust Funds are the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. These funds are accounts managed by the Department of the Treasury. They serve two purposes: (1) they provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.

Benefits to retired workers and their families, and to families of deceased workers, are paid from the OASI Trust Fund. Benefits to disabled workers and their families are paid from the DI Trust Fund. More than 98 percent of total disbursements in 2012 were for benefit payments.

A Board of Trustees oversees the financial operations of the trust funds. The Board reports annually to the Congress on the financial status of the trust funds.

How are the trust funds invested?

By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.

In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.

Data on trust fund investments provide a breakdown by interest rate and trust fund for any month after 1989.

http://www.ssa.gov/oact/progdata/investheld.html

What interest rate do they earn?

The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.

The numeric average of the 12 monthly interest rates for 2012 was 1.458 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.091 percent in 2012. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.

How do benefits get paid each month?

Money to cover expenditures (mainly benefit payments) from the trust funds comes from the redemption or sale of securities held by the trust funds. When "special-issue" securities are redeemed, interest is paid. In fact, the principal amount of special issues redeemed, plus the corresponding interest, is just enough to cover an expenditure.

Can the trust fund remain solvent?

In the annual Trustees Report, projections are made under three alternative sets of economic and demographic assumptions. Under one of these sets (labeled "Low Cost&quot the trust funds remain solvent for the next 50 years. Under the other two sets (the "Intermediate" and "High Cost&quot , the trust funds become depleted within the next 20 years. The intermediate assumptions reflect the Trustees' best estimate of future experience.

Some benefits could be paid even if the trust funds are depleted. For example, under the intermediate assumptions, annual income to the trust funds is projected to equal about three-quarters of program cost once the trust funds become depleted. If no legislation has been enacted to restore long-term solvency by that time, about three-quarters of scheduled benefits could be paid in each year.

The Trustees believe that extensive public discussion and analysis of the long-range financing problems of the Social Security program are essential in developing broad support for changes to restore the long-range balance of the program.

<more at>

http://www.ssa.gov/oact/progdata/fundFAQ.html#a0=4