Social Security Trust Fund Cash Flows and Reserves

Introduction Social Security benefits are paid from the reserves of the Old-Age, Survivors, and Disability Insurance (OASDI) trust fund. The reserves are funded from dedicated tax revenues and interest on accumulated reserve holdings, which are invested in Treasury securities. These cash flows--the tax income, the investment (and redemption) of the securities, the interest on the invested reserves, and the payment of benefits--become critically important when reserves are low relative to benefit payments, as occurred in 1983. In 2015, reserves are large enough that cash flow will not be a problem for the trust fund for almost 20 years. In recent years, attention has focused on the cash flows' effects on the rest of the federal budget. This article examines the cash flows and reserves from the perspective of not just the trust fund itself but also from that of the rest of the budget. The Social Security trust funds date back to the "Old-Age Reserve Account," established under the 1935 Social Security Act. The act authorized Congress to appropriate funds to the reserve account and separately established a new payroll tax sufficient to provide those funds. However, because a recent Supreme Court decision (unrelated to Social Security) had raised questions about the constitutionality of appropriating the tax revenues directly to the reserve account, the act did not explicitly earmark those revenues to the account. Nevertheless, it was understood that Congress would simply appropriate the tax revenues for that purpose even without a statutory requirement to do so. By the time the act was first amended in 1939, the constitutional questions had been resolved, and the 1939 amendments provided for automatic appropriation of the payroll taxes to the reserve account. Under both the 1935 act and the 1939 amendments, the accumulated reserves were invested in interest-bearing Treasury securities, with the interest accruing to the reserves. (1) The 1939 amendments brought other changes to the reserve account, more to clarify the existing arrangement than to modify it. Those changes were recommended by the 1938 Social Security Advisory Council, which had proposed that the reserve account be made more specifically "a trust fund, with designated trustees acting on behalf of the prospective beneficiaries of the program. The trust fund should be dedicated exclusively to the payment of the benefits provided under the program and, in limited part, to the costs necessary to the administration of the program" (Social Security Administration [SSA] n.d. a). Following those recommendations, Congress converted the Old-Age Reserve Account into the Old-Age and Survivors Insurance (OASI) Trust Fund and established a Board of Trustees whose primary task was to "Hold the Trust Fund" and report on it annually. The amendments clarified that administrative costs as well as benefits were to be paid out of the reserves. That arrangement continues today with very little change, other than the addition in 1957 of the Disability Insurance (DI) Trust Fund--with the same trustees and investment rules as the OASI fund. Although the OASI and DI funds are maintained separately, they are managed under parallel procedures. Therefore, to simplify the discussion, this analysis combines the two and refers to a single OASDI fund. Similarly, "cash flows" and "reserves" in this article refer to combined amounts of those two funds, unless otherwise noted. (2) As a reserve fund, revenues earmarked for Social Security benefits can be collected in advance of the actual expenditure. Interest on the invested reserves can be an important component of the fund income, particularly when--as has occurred in the past several decades--a large reserve is built up in advance of a demographic wave of retirements. The Social Security Act provides that the funds are maintained "on the books of the Treasury." The Treasury manages the Social Security accounts in much the same way that a bank manages a checking account: Accurate accounts are kept of the cash deposits and the accruing interest; cash (plus interest) withdrawals are allowed whenever needed; and in the meantime, the bank can put the cash to other uses. …