Social Security is, hands-down, the country's most important social resource. Each month, over 63 million benefit checks are sent out, with more than a third of all recipients being lifted out of poverty as a direct result.
But importance doesn't necessarily equate to understanding. Surveys throughout the years have shown that regardless of whether people are in their 20s or nearing retirement, their knowledge of Social Security is usually subpar. And as is often the case with money matters, what you don't know can come back to bite you.
Social Security has been net-cash positive for the past 36 years
Though there are numerous misconceptions about the Social Security program, one that stands out is how little the public understands about Social Security's asset reserves, and, in particular, how valuable these asset reserves have been from the perspective of income generation.
Social Security has two primary trust funds: the Old-Age and Survivors Insurance Trust (OASI) and the Disability Insurance Trust (DI). As the names suggest, the OASI handles payouts to retired workers and the survivors of deceased workers, while the DI pays out benefits to the long-term disabled. Although there is no such thing as the "OASDI," it's often easier to simply report on Social Security as if there were a single fund. So, as we move forward in our explanation, understand the OASDI is the combination of the finances for the OASI and DI trusts, for simplicity's sake.
Since 1983, when the Reagan administration last passed a major overhaul of the Social Security program, Social Security has been net-cash positive. This means that it's been bringing in more money each year than it's been paying out. Almost 99% of what it pays out goes to benefits, with the remainder covering the Social Security Administration's (SSA's) operating expenses, and transfers to the Railroad Retirement Exchange.
Investing the program's asset reserves is bringing in a pretty penny
Since its inception (but mostly since 1983), Social Security has built up nearly $2.89 trillion in net cash surpluses from the OASDI, which are commonly known as its "asset reserves." But the agency doesn't let this excess cash simply lie around in a vault and collect dust. Doing so would mean that this cash would lose purchasing power over time to inflation, which is a fancy word for the rising price of goods and services. Rather, the SSA invests these annual net-cash surpluses into a combination of special-issue federal bonds and, to a lesser extent, certificates of indebtedness.
Why invest in special-issue federal bonds? The simple answer is that the SSA is required by law to do so. Though other equity investments, like the stock market, have demonstrated higher long-term returns, they're far more volatile and don't come with the near-guaranteed return of bonds. The relatively predictable return of bonds backed by the full faith and credit of the U.S. government makes it easier for the Social Security Board of Trustees to make long-term (75-year) predictions for the program each year.
So, Social Security has collected more than it has spent for the past 36 years, and it has invested in an array of bonds with various yields and maturity dates. The next logical question is: How much interest income are these bonds generating for the program? According to investment holdings data from the SSA, the average yield on these interest-bearing assets is 2.847%, as of the end of March 2019. With just shy of $2.89 trillion in asset reserves, this works out to $82.2 billion in annual interest income in 2019. Looking farther out, $804 billion in interest income is expected to be collected between 2018 and 2027, per the 2018 Trustees report.
Bye, bye, misconceptions
But there are important dynamics that need to be taken into account here. First, you should understand that the highest-yielding bonds are set to mature between 2019 and 2022. This is because bond yields and the Federal Reserve's monetary policy tend to be closely linked. With the Fed holding interest rates near record lows for seven years between December 2008 and December 2015, most of the program's recent bond purchases have carried sub-3% yields. This could mean a modest decline in the average interest rate is on its way in the years to come.
You should also know that, despite what you might have incorrectly read on social media, this nearly $2.89 trillion in borrowed money is fully accounted for, and the program is (as shown) generating a healthy amount of interest income on that borrowed amount. This is a roundabout way of saying that Congress hasn't stolen a dime from the program, and that it is paying interest. In fact, the borrowing arrangement between the federal government and Social Security could be described as symbiotic, with the government getting a readily available source of borrowing for general spending, and Social Security generating more than 8% of its annual income from interest.
The last thing you'll want to know is that the program's asset reserves are icing on the cake, so to speak, but aren't necessary for the long-term survival of Social Security. The 12.4% payroll tax on earned income of up to $132,900 (as of 2019) and the taxation of benefits ensure that enough cash is flowing into the program for disbursement to eligible beneficiaries. Social Security's asset reserves buy lawmakers the time needed to pass legislation that would raise additional revenue, cut expenditures, or enact some combination of the two. Even if its asset reserves go to $0, benefits can be reduced across the board to ensure the survival of Social Security.