How Social Security Trust Funds Work (And Are They Really Running Out?)

Social Security and the program’s trust funds are a frequent topic of discussion. Yet, do you truly understand how the trust funds work or how changes to these funds might impact your retirement plan?

With so much misinformation floating around, it’s crucial to get a clear understanding of the future of the nation’s main retirement program.

Current headlines are foreboding, but don’t let the doomsayers scare you. We’re here to explain what the Social Security trust funds are, how they work, and what it means for your future.

The Social Security trust funds are financial accounts that support two programs. The Old-Age and Survivors Insurance (OASI) Trust Fund covers retiree and survivor benefits, and the Disability Insurance (DI) Trust Fund is earmarked for disability benefits.

Both of these funds are used to pay benefits and administrative costs.

Taxes from Social Security and additional funds go into the two accounts, which together are sometimes referred to as the “Social Security trust fund."

Historically, Social Security has operated on a “pay as you go” basis, where current payroll taxes fund existing benefits. In the past, Social Security regularly collected more than it needed, which eventually resulted in $2.9 trillion in trust fund reserves.

However, since 2021, Social Security has been dipping into these extra funds to cover all of its obligations in full.

Even if the reserves eventually run out as projected, payroll taxes will still be enough to cover 83% of benefits. And it is unlikely that it would come to this, as many experts expect policymakers to likely intervene and restructure the program so it can make good on 100% of its promised benefits.

Trust funds are invested in U.S. Treasury securities, which are considered incredibly safe because the U.S. government backs them.

While interest rates on these securities are modest, the money is safe from the type of volatility that can rock the stock market. And these conservative returns can still add up to significant sums. For 2024, Treasury securities are projected to earn $68.6 billion in interest income.

Before answering, let’s be clear: Social Security itself isn’t in trouble. Instead, it is the money in the reserves — the trust funds — that is in danger of being used up.

Since 2021, Social Security payroll taxes have not been enough to cover all of the program’s obligations in full. As a result, the program has had to dip into the trust fund to cover the shortfall, and that fund is projected to be depleted by 2035.

The trust funds are being used as intended, although funds are being depleted for several reasons:

• An aging population: Baby boomers — a huge demographic — are retiring and drawing benefits.
• Longevity: People are living longer, which means they are receiving benefits for many more years than in previous generations.
• Lower birth rates: There are fewer workers entering into the workforce compared to previous generations, and less money from payroll taxes to support the growing number of retirees.
• Economic factors: Wages and economic conditions can impact the health of Social Security. With higher rates of unemployment or slower wage growth, fewer funds are collected through payroll taxes, which places an increasing burden on the trust fund.

If trust funds are exhausted, benefits won’t end. However, they might be reduced.

Right now, there are enough surplus funds to pay benefits in full up until 2035. After that, Social Security should be able to pay about 83% of its scheduled benefits, with those funds coming exclusively from payroll taxes.

While not a catastrophe, the situation isn’t ideal. Likely, Congress will take action to ensure the long-term solvency of Social Security and its trust funds.

Yes, Social Security will almost certainly still be around when you retire. However, ‌the program’s structure is likely to change. This might mean increasing revenues through higher taxes so full benefits can be paid out.

Or, it could mean reducing benefits or raising the age of eligibility for Social Security.

There are many other proactive steps you can take to plan for your post-working years, regardless of Social Security’s future. They include:

1. Plan for the long haul: Many retirees focus on the short-term, and overlook the risks that come with aging, inflation, and rising costs of living.
2. Delay retirement if possible: Working longer and delaying retirement can significantly boost your financial security. The longer you work, the more you can save and invest. And if you can delay claiming Social Security benefits until age 70, you can increase your monthly payments.
3. Diversify your income: While Social Security is a key source of retirement income, it typically covers only a portion of pre-retirement earnings. Having a diverse stream of income — including IRAs, annuities, royalties, part-time work, or side hustles — is helpful.
4. Prepare for health care costs: Health care is one of the largest expenses in retirement, especially if long-term care becomes necessary. Yet, this is one of the more overlooked aspects of retirement planning. If possible, build up money in a health savings account while you’re still working so you can prepare for future medical costs.
5. Re-evaluate your expenses: As you approach retirement, it’s a good idea to assess your current lifestyle and look for areas where you can reduce costs. This may include downsizing your home or moving to a location with a lower cost of living.

Understanding the ins and outs of Social Security trust funds is about more than just trying to grasp ‌financial jargon: It’s understanding your financial future.

Whatever the future of Social Security, try to find ways to supplement your Social Security payments so you have enough income to see you through your golden years.