The truth behind Social Security's funding
To understand the government's borrowing from Social Security, it's important to know how the retirement benefits program is financed.
Under the law, workers and their employers pay a dedicated Social Security payroll tax. Both employees and employers pay a 6.2% tax on wages up to a "taxable maximum" limit of $176,100 in 2025. That's a total of 12.4% of wages (self-employed workers pay the whole thing). Around 40% of Americans who receive Social Security benefits, also pay taxes on this money, which is also revenue for the program. But there’s another source of income: interest.
When the program collects more revenue than it pays out — which happened during the 1990s and 2000s — the money goes into the trust funds. When it operates at a deficit, as it has in recent years, it redeems asset reserves held in the trust funds.
Section 201 of the Social Security Act requires that the money in the trust funds be invested in interest-bearing debt securities issued and guaranteed by the federal government known as U.S. government obligations. As of May 2023, the trust funds held about $2.83 trillion in U.S. Treasury securities.
When the trust fund invests in these government bonds, the money goes into the general fund of the U.S. Treasury and can be used to fund other programs. But the debt will have to be repaid and the investments generate interest. In 2022, the trust fund's investments generated approximately $66.4 billion in interest in 2022, representing 5.4% of Social Security’s total income.
The CRFB noted that when Social Security’s long-term projections are calculated, it is assumed this $2.8 trillion will be repaid, so this borrowing from the program’s trust fund isn’t the cause of the upcoming shortfall.
However, it has been said that the U.S. government should have saved the excess payroll taxes it collected when Social Security was running a surplus. "Congress used funds meant for the future to not only cover, but also to expand, current and future costs, creating greater debt afflicting both current and future generations," said Romina Boccia of the Cato Institute.
"Many argue that these Social Security surpluses masked other deficits in the rest of the government and thus allowed policymakers to enact more deficit-financed tax cuts or spending increases than they otherwise would have," said the CRFB. "In that sense, it could be argued that Congress and the President 'raided the trust fund.'"
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Learn MoreWhy is Social Security running short of money?
If the government isn't exactly raiding Social Security, why is the program in financial trouble? It's simple. There are not enough workers paying into the system to fund the benefits of all the retirees. Declining fertility rates and increasing life expectancies are causing the U.S. population to be older. Social Security is operating at a deficit so more money comes out of the trust fund every year.
There are actually two different trust funds. The Old-Age and Survivors Insurance (OASI) Trust Fund is used to fund retirement benefits and is expected to be able to pay 100% of the promised amount through 2033. The Disability Insurance (DI) Trust Fund, which pays for Social Security Disability benefits, is expected to be able to pay 100% of promised benefits through 2098.
The most likely outcome is that the two trust funds will be combined, which means retirement benefits can continue in full until 2035, according to the most recent Trustee's report. At that time, unless something has changed, the trust fund will run dry and Social Security will only be able to pay benefits out of the revenue coming in.
If this is allowed to happen, there will only be enough money to pay 83% of promised benefits — which means an automatic cut will have to occur. Lawmakers probably won't let this happen, but it remains to be seen how they will solve the problem.
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