How Prescription Drugs Are Pinching Your Pocketbook on 'AARP Live' at 10 p.m. ET Online or on RFD-TV

 

Social Security Trust Funds: Some Basics

The Social Security System Comprises Four Trust Funds:

  • Old-Age and Survivors Insurance (OASI)
  • Disability Insurance (DI)
  • Hospital Insurance (HI)
  • Supplemental Medical Insurance (SMI)

Four Trust Funds

The Old-Age, Survivors and Disability Insurance programs pay monthly cash benefits to the worker and the worker's family should she or he retire, become disabled, or die.

The health care portion of the system, Medicare, comprises both Part A, Hospital Insurance (HI), and Part B, Supplemental Medical Insurance (SMI). HI provides for Medicare-covered inpatient hospital and skilled nursing facility expenses, and SMI provides for Medicare-covered doctor bills and other outpatient expenses.

The OASDI and HI trust funds are financed primarily through the FICA and SECA tax. Employers and employees each pay 6.2% of a worker's salary up to the taxable maximum for the portion of the FICA tax dedicated to OASDI. For HI, employers and employees each pay 1.45% of the worker's full salary-there is no taxable maximum for HI. The tax rate for self-employed individuals is 15.3%, an amount equivalent to the combined employer and employee contribution for OASDHI. SECA, however, is computed based upon 92.35% (100% minus 7.65%, the combined OASDI and HI rates) of net earnings, and the self-employed may deduct one-half of the combined tax from income subject to federal income tax.

The SMI trust fund receives about 25% of its financing through premium payments of enrollees and 75% from general revenues. SMI receives no funding from FICA and SECA tax dollars.

What Are the OASDHI Trust Funds?

The Old-Age and Survivors Insurance (OASI), Disability Insurance (DI), and Hospital Insurance (HI) trust funds are separate accounts in the United States Treasury to which FICA and SECA taxes are credited.

How Are the OASDI Trust Fund Dollars Used?

By law, FICA and SECA tax dollars are reserved solely to pay benefits and administer  the OASDI and HI programs. Dollars not used to pay for current benefits or administration are invested by the Treasury in special issue, interest-bearing United States government securities. An analogy would be an individual who, after paying the monthly bills, buys a Certificate of Deposit or puts money into an interest-bearing account. And, analogous to the way a bank or money fund might invest an individual's dollars in loans for mortgages or college educations or building shopping centers, the United States Treasury invests the Social Security reserves in administering the federal government, i.e., paying for highway construction, defense, Head Start, and so on.

The trust funds hold the securities just as an individual investor holds the certificate or savings book. The securities earn interest for the trust funds, just as investments do for an individual. In 1998, $49.3 billion in interest was earned and then reinvested in securities belonging to OASDI.

OASDI Trust Fund Ratios

 

Why Have Trust Funds?

The securities held by the trust funds are future financial claims against the government. Securities in the Social Security trust fund accounts, along with other Social Security revenues, give the Treasury the authority to write checks. Just as a positive balance in a checking account means an individual can draw on that account, a balance in the Social Security trust funds means that checks can be written on the Social Security account.

While all government programs have Treasury accounts, for Social Security, the trust fund designation means that the total amount received by Social Security beneficiaries is not subject to the annual Congressional appropriation process. As long as there is are balances in Social Security's trust fund accounts, benefits are paid with monies designated specifically for that purpose.

The Social Security trust funds represent a long-term commitment on behalf of the government to Social Security. And, as long as the program has been in operation (64 years), the government has not defaulted on these claims.

What Is the Current and Future Status of the OASDI Trust Funds?

The Trustees, using the intermediate, or best estimate, assumptions in the 1999 Old-Age, Survivors and Disability Insurance Trustees Report, project that the OASDI trust funds will accumulate assets for the next 15 years.

However, the Trustees project that beginning in 2014 some of the interest earnings will need to be combined with tax revenue to cover benefit payments. By 2022, income (including contributions and interest) will fall short of expenditures, and it will be necessary to start redeeming the trust fund securities. The Trustees report projects the OASDI trust funds will be depleted in 2034.

Footnotes

  1. The trust funds also receive income from beneficiaries who pay tax on their benefits and from interest that is earned on the trust fund assets.
  2. The Federal Insurance Contributions Act (FICA) and the Self Employment Contributions Act (SECA) are often referred to as the payroll tax.
  3. The taxable maximum is indexed annually to reflect wage growth. In 1999, it is $72,600.
  4. The FICA and the SECA tax rates are set by law.
  5. The cost of administering the programs in fiscal year 1998, as a percentage of benefit payments from each trust fund, was 0.9% for OASI and DI combined and 1.3% for HI.
  6. The law restricts the investment of the Social Security reserves to interest-bearing obligations of the United States or obligations whose principal and interest are guaranteed by the U.S. government.

Written by Laurel Beedon and Charles Ford, AARP Public Policy Institute

April 1999
©1999 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049