The Financing of Social Security

Source: AARP.org | August 2009

Fact 1: The Social Security Trust Funds are a sure thing. 

Many people are under the impression that Social Security is broken, unable to fulfill its promise to the people who have contributed to it over the years. Well, the fact is, the Social Security Trust Funds aren't just sound, they're building a surplus. Today, that surplus is $2.4 trillion and growing.
 
How is that possible? Today, 66 million boomers are paying into the system, and, along with about 95 million other employed Americans, boomers are helping to build that reserve. In addition to that, nearly one in three retired Americans is contributing to the trust funds by paying taxes on Social Security. Every bit counts: The income in the Social Security Trust Funds is earmarked to pay for benefits and administrative costs. Right now, there is more money coming in than is going out. In 2008, Social Security's income was $805 billion. It paid out $615 billion, leaving a surplus of about $190 billion. That $190 billion went into the trust funds. 

Fact 2: Financing Social Security isn't the toughest thing government bonds have ever done. 

Some people who want to scrap Social Security call the government's investment in Treasury Bonds an accounting trick. Others think it's just good, thoughtful, and conservative investing.
 
It's natural that people are confused and wonder what the Social Security Trust Funds are and where the money goes. Well, here's how it works, plain and simple: The Social Security trust funds buy interest-earning, special Treasury Bonds—similar to the government bonds that pension funds and private investors buy. That's easy to understand.

In 2008, the trustees invested what was a nearly $190 billion Social Security surplus, buying special Treasury Bonds that are earning interest for the trust funds. This amount brought the total holdings of the trust funds to $2.4 trillion. When we need to use them, the Treasury Bonds will be cashed.
 
These bonds aren't only safe; they're earning approximately 5.1 percent in annual interest. In 2008, 14 percent of Social Security's total income—that was over $116 billion—was earned in interest alone. Treasury Bonds are backed by the full faith and credit of the U.S. government.
 
Fact 3: How big of a challenge are we facing on Social Security?
 
The problem isn't as big as you might have heard. Without any change at all, Social Security will do just what it's been doing—paying 100 percent of promised benefits—until 2037. After that, if nothing is done, Social Security will still be able to pay more than 70 percent of promised benefits. 

Obviously, that's not acceptable. Getting a little over 70 percent wouldn't be okay today, and it won't be okay 30 years from now, either; that's why this is such an important issue. We need to start considering changes now.