Social Security Trust Fund: How Does It Work?

Social Security gets funded a lot differently from most government programs. Find out why it matters to you.

Dan Caplinger
Dan Caplinger
Jul 7, 2014 at 5:10PM
Investment Planning

Social Security is confusing to many people, because the program has a trust fund that is at risk of running out of money. In assessing your own benefits, it's useful to know exactly what the Social Security Trust Fund is and why it matters to you.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, explains how the Social Security Trust Fund works. Essentially, all the payroll taxes the Social Security Administration collects go toward benefits and administrative costs, and when there's money left over, it's required to go into the Social Security Trust Fund for use in future years. Dan notes that the Trust Fund must invest in Treasury securities, which earn market interest rates. Dan further points out that recently, Social Security started paying out more in benefits than it takes in from payroll taxes, requiring it to tap part of its Trust Fund to cover the shortfall. When the Trust Fund runs out, Social Security won't just stop, but it will have to reduce benefits by about a quarter from current levels.