What it means
Workers and employers pay payroll taxes, and the part earmarked for retirement and survivor benefits goes into this fund. The money is not sitting in a vault.
By law it is invested in special Treasury securities, so the fund is a claim on the federal government that earns interest. The fund is a pay-as-you-go system with a reserve attached.
Most of each year's benefits are paid out of that year's taxes, and the reserve acts as a cushion when benefits exceed income. A second fund covers disability benefits, and the two are sometimes looked at together as one combined measure.
The trustees of the programme publish an annual report that projects income and costs far into the future. Their main finding to watch is the date when the reserve is projected to run out, because the law generally limits payments to the money available.
If the reserve were exhausted, incoming taxes would still cover a large share of scheduled benefits, but not all of them. Several forces shape the fund.
An ageing population means more beneficiaries relative to workers, longer lives mean benefits are paid for more years, and wage growth drives the tax revenue. Changes in birth rates, immigration and employment can all shift the projections.
For finance readers, the fund is a useful example of a large pension-style liability and of why actuarial assumptions matter. Small changes in the assumptions produce big differences in long-range results, and the figures are best read as projections rather than predictions.
In practice
Real-world examples.
Example
A financial planner explains to a 58-year-old client that Social Security retirement benefits are paid from this fund. She advises the client to build a plan that treats the benefit as an important part of retirement income, while allowing for the chance that rules may change.
Example
An economist at a think tank compares the fund's income and cost over 25 years. The gap between them widens as more workers retire, and she shows how different tax or benefit changes would close it. Her report presents the results as ranges.
Example
A company finance director builds a workforce plan for a business with many older employees. She reads the trustees' report to understand how retirement benefits might affect when workers choose to retire, since that affects hiring costs.
Formula
Calculation
Change in fund balance = income (payroll taxes + interest + tax on benefits) - cost (benefit payments + administration)
Trust fund ratio = fund reserves at start of year / cost during the year
The figures below are hypothetical and chosen only to show the arithmetic. Suppose payroll taxes are $900 billion, interest is $60 billion and tax on benefits is $50 billion, so income = 900 + 60 + 50 = $1,010 billion. Suppose total cost is $1,100 billion.
Change in balance = 1,010 - 1,100 = -$90 billion.
If the reserves at the start of the year were $2,200 billion, the trust fund ratio = 2,200 / 1,100 = 2.0, meaning the reserve could cover two years of cost. After the $90 billion shortfall, reserves fall to 2,200 - 90 = $2,110 billion.Case study
Seen in the real world.
Brightwater Advisory is an illustrative, fictional planning firm that helps clients decide when to claim retirement benefits. A client worried that the fund would run out and wanted to claim as early as possible.
The firm's adviser read the latest trustees' report with the client. She showed that even in the projections where the reserve is used up, ongoing payroll taxes would still fund a large share of scheduled benefits, so the realistic risk was a reduction rather than a total loss.
Using this, the adviser modelled claiming at different ages with benefits cut by 20% in the cautious case. The client chose to delay claiming for three years, because the larger monthly payment still came out ahead even after the cut. The illustrative lesson is that fund projections should be turned into scenarios, not into panic.
Watch out
Common mistakes.
- Believing the fund is a personal savings account for each worker, when it is a shared pool and benefits are set by a formula.
- Assuming that if the reserve runs out, benefits stop entirely, when incoming taxes would still pay a large part of them.
- Treating long-range projections as certain, when they depend on assumptions about births, wages, employment and longevity that can change.
Questions
People also ask.
What does the fund invest in?
By law it holds special-issue Treasury securities, which pay interest and are backed by the US government.
How is it different from the Disability Insurance Trust Fund?
The Old-Age and Survivors fund pays retirement and survivor benefits, while the disability fund pays benefits to workers who cannot work due to a long-term disability.
Who reports on the fund's health?
A board of trustees publishes an annual report with projections of income, cost and the date when the reserve is expected to be exhausted.
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