Where do Social Security payments go?

A portion of each paycheck we receive is sent to the federal government for Social Security. Where does this money go?

The money is kept in two trust funds – one for retirees (the Old Age and Survivors Insurance Trust Fund) and one for people who are unable to work due to a disability (the Disability Insurance Trust Fund). The trust funds can only be used to pay Social Security benefits; the funds cannot be used to pay for other government programs.

Tax payments to the Social Security trust funds are intended to be enough to cover outgoing benefits to those who’ve retired or are disabled. When there’s more money coming in than being paid out, that additional money goes into savings. We’ve been building up savings since the early 1980s, after Congress passed legislation changing Social Security benefits, coverage, and financing.

With those savings, the trust funds have an additional source of income: interest. The savings is invested in US Treasury bonds, allowing the trust funds to earn interest in exchange for loaning the federal government money. The trust funds are paid back similar to the way other investors in Treasury bonds are paid back.

However, since the government is essentially lending money to itself, accounting can be confusing. The amount owed to the Social Security trust funds generally isn’t included in the debt number cited in national discussions. Borrowing money from Social Security, rather than bonds issued to the public, makes government debt appear lower. You can get the total debt, including what is owed to Social Security, here on USAFacts.

A benefit of investing in government bonds is they pay a guaranteed interest rate, whereas other asset types are more volatile. For example, see the ups and downs of the S&P 500 stock index over the past four decades.

Bonds payments are guaranteed at a certain interest rate; however, that rate has declined, from 9% in 1990 to 2.9% today.

The US government aims to ensure that Treasury bonds return the equivalent of the US inflation rate or higher to investors. Since 1990, returns on 10-year Treasury bonds issued to the trust funds have exceeded inflation. The returns on these government bonds have been falling over time, but continue to outpace the overall inflation rate.

As of 2017, the trust funds contained nearly 3 trillion dollars. The money invested through the trust funds accounts for 14% of US debt.

One risk of investing in Treasury bonds is if the government were to default on its bonds. In this case, the savings could vanish. However, the US Treasury has historically been a highly-reliable debtor.

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