If you've heard of the Social Security trust fund at all, it's probably because you read somewhere that it's going to run out of money soon, threatening our future Social Security benefit checks. There's a lot more to the trust fund than that, though, and the news isn't all bad, either.
Here are some key things to know about the Social Security trust fund:
There are actually two funds. There is the Old-Age and Survivors Insurance, or OASI, Trust Fund, which dates back to 1937, and the Disability Insurance, or DI, Trust Fund, started in 1957, and both are managed by the Department of the Treasury.
They have two key purposes. The Social Security Administration explains:
(1) [T]hey provide an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits. The Social Security Act limits trust fund expenditures to benefits and administrative costs.
They're invested in "special" securities. Trust fund assets used to be invested in the same Treasury securities that you or I could buy, but that's no longer the case. Now they're invested in "special issues" from the Treasury, which are always redeemable at face value. That's not so with general marketable Treasury securities, as those will see their values fluctuate along with prevailing interest rates if they're sold before their maturity date. The average nominal interest rate for special issues in 2014 was 2.271%, and in January 2015 it was 2.125%. Note that since Treasury securities are backed by the U.S. government, they're considered about as safe as they can be.
The trust funds have run a surplus for a long time. Between taxes taken in and interest earned on them, and fewer benefit checks written, the trust funds have been running a surplus in every year since 1984.
The Social Security trust funds are indeed headed toward insolvency. Those surpluses that began in 1984 are likely to stop in 2020, at which point the Social Security system can rely on incoming interest payments to make up the deficit -- for a while. According to several government estimates, the funds are likely to become insolvent between 2033 and 2037 -- as early as 18 years from now -- if no changes are made. The reason behind the change is this: whereas there were about 2.8 workers paying into the Social Security system for each recipient in 2013, it's projected that by 2035, there will be just 2.1 workers per beneficiary.
If the Social Security funds run dry, benefit checks won't necessarily stop being issued. If the solvency of the Social Security coffers fails at some point, it won't mean that there's no more money for benefits. It will mean that the fund is no longer taking in enough money to cover all promised benefits. Thus, payment checks are likely to end up shrinking -- by about 25%, according to the Social Security Administration. Thus, even this worst-case scenario isn't utter catastrophe -- though, given that the recent average monthly retiree benefit of $1,328 for individuals and $2,176 for retired couples aren't huge sums, a 25% hit will be quite meaningful, reducing the annual payout for individuals from $15,936 to around $11,952 and for couples from $26,112 to around $19,584.
Trust fund solvency can be restored. The funds' current worrisome trajectory isn't unchangeable, and the system can be shored up in numerous ways. Better still, many people want the system shored up, so that's a reasonably likely eventuality. Some of many shoring-up strategies that are being floated around include removing the Social Security income taxation cap, so that all of each earner's income is taxed for Social Security, increasing the current tax, raising the full retirement age at which retirees are scheduled to start collecting benefits, and changing the formula for the cost-of-living adjustments made annually to benefit checks. It remains to be seen which strategy or strategies will be employed.
The bottom line for the Social Security trust funds is that they're on shaky ground, but it's not so shaky that it can't be fixed. It's likely that future retirees will continue to collect benefits, though there's a chance they may be smaller. Our best defense, therefore, is to be sure we save and invest money for retirement on our own, not relying too much on Social Security.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.