94-593 EPW
Updated April 29, 1998
CRS Report for Congress
Received through the CRS Web
Social Security Taxes: Where Do Surplus Taxes
Go and How Are They Used?
David Koitz
Specialist in Social Legislation
Education and Public Welfare Division
Summary
The costs of the Social Security program, both its benefits and administrative
expenses, are financed by a tax on wages and self-employment income. Commonly
referred to as FICA and SECA taxes (because they are levied under the Federal
Insurance and Self-Employment Contributions Acts), these taxes flow each day into
thousands of depository accounts maintained by the government with financial
institutions across the country. Along with many other forms of revenues, these Social
Security taxes become part of the government’s operating cash pool, or what is more
commonly referred to as the U.S. treasury. In effect, once these taxes are received, they
become indistinguishable from other monies the government takes in. They are
accounted for separately through the issuance of federal securities to the Social Security
trust funds — which basically involves a series of bookkeeping entries by the Treasury
Department — but the trust funds themselves do not hold money. They are simply
accounts. Similarly, benefits are not paid from the trust funds, but from the treasury.
As the checks are paid, securities of an equivalent value are “written off” the trust funds.
Generally speaking, the federal securities issued to any federal trust fund represent
“permission to spend.” As long as a trust fund has a balance of such securities, the
Treasury Department has legal authority to keep issuing checks for the program. In a
sense, the mechanics of a federal trust fund are similar to those of a bank account. The
bank takes in a depositor’s money, credits the amount to the depositor’s account, and
then loans it out. As long as the account shows a balance, the depositor can write checks
that the bank must honor. When more Social Security taxes are received than spent, the
balance of securities posted to the Social Security trust funds rises. Simply put, these
balances, like those of a bank account, represent a promise, a form of IOU from the
government that if needed to pay Social Security benefits, the government will obtain
resources equal to the value of the securities. The surplus taxes themselves are then
used for any of the many functions of government.
Congressional Research Service ˜ The Library of Congress

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Discussion
A Few Basics About Social Security Financing
Financing to cover the
Social Security and HI Tax Rates
costs of the Social Security
Under Current Law (in percent)
program — both its benefits
Employee rate
Combined
and administrative expenses
employee/
CY
OASI
DI
OASDI
HI
Total
employer
— is provided by flat-rate
taxes levied on payrolls and
1990
5.60
.6
6.20
1.45
7.65
15.3
self-employment income
1994-96
5.26
.94
6.20
1.45
7.65
15.3
1997-99
5.35
.85
6.20
1.45
7.65
15.3
(FICA and SECA taxes).
2000
5.30
.9
6.20
1.45
7.65
15.3
More than 95% of the work
The rate for the self-employed is the same as the combined
force is required to pay
employee/employer rate; however, only 92.35% of net self-employment
them. The FICA tax is
earnings is taxable and half of the taxes so computed is deductible for
levied on a worker’s
income tax purposes.
earnings and is paid both by
employees and employers;
the SECA tax is levied on self-employment income. Nonwork income is not taxed. Both
the FICA and SECA rates have three components: one for Old Age and Survivors
Insurance (OASI), another for Disability Insurance (DI), which together comprise what
is commonly thought of as Social Security, and a third for the Hospital Insurance (HI)
portion of Medicare. In 1998, the OASDI portion will be levied on earnings up to
$68,400. This amount rises annually to reflect increases in average earnings in the
economy. The HI portion is levied on all earnings.
Where Do Surplus Social Security Taxes Go?
Contrary to popular belief, Social Security taxes are not deposited into the Social
Security trust funds. They flow each day into thousands of depository accounts
maintained by the government
with financial institutions
Estimated Social Security Surpluses
across the country. Along with
($s in billions)
many other forms of revenues,
Surplus tax
Interest
Total surplus
these Social Security taxes
CY
Taxes
Outgo
income
income
income
become part of the
government’s operating cash
1998
435
383
52
49
101
1999
450
396
53
54
107
pool, or what is more
2000
468
413
55
59
114
commonly referred to as the
2001
488
433
55
65
120
U.S. treasury. In effect, once
2002
509
455
54
72
126
2003
532
478
54
79
133
these taxes are received, they
2004
557
504
53
87
140
become indistinguishable
2005
585
533
52
96
148
from other monies the
2006
614
565
50
105
155
2007
648
599
49
115
164
government takes in. They are
accounted for separately
Source: 1998 Social Security Trustees’ Report, Intermediate
through the issuance of federal
projections.
securities to the Social
Security trust funds — which
basically involves a series of bookkeeping entries by the Treasury Department — but the

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trust funds themselves do not receive or hold money.1 They are simply accounts.
Similarly, benefits are not paid from the trust funds, but from the treasury. As the checks
are paid, securities of an equivalent value are removed from the trust funds.
Does This Mean That the Government Borrows Surplus Social Security
Taxes?
Yes. When more Social Security taxes are received than spent, the money does not
sit idle in the treasury, but is used to finance other operations of the government. The
surplus is then reflected in a higher balance of federal securities being posted to the trust
funds. These securities, like those sold to the public, are legal obligations of the
government. Simply put, the balances of the Social Security trust funds represent what
the government has borrowed from the Social Security system (plus interest). Like those
of a bank account, the balances represent a promise that if needed to pay Social Security
benefits, the government will obtain resources in the future equal to the value of the
securities.
Are the Federal Securities Issued to the Trust Funds the Same Sort of
Financial Assets That Individuals and Other Entities Buy?
Yes. While generally the securities issued to the trust funds are not marketable, i.e.,
they are issued exclusively to the trust funds, they do earn interest at market rates, have
specific maturity dates, and by law represent obligations of the U.S. government. What
often confuses people is that they see these securities as assets for the government. When
an individual buys a
government bond, he or she has
established a financial claim
Social Security Trust Funds,
against the government. When
Estimated Year End Assets
the government issues a
($s in trillions)
security to one of its own
$4
accounts, it hasn’t purchased
$3
anything or established a claim
against some other person or
$2
entity. It is simply creating an
$1
IOU from one of its accounts to
another. Hence, the building
$0
up of federal securities in
1998 2000 2005 2010
federal trust funds — like those
2015
2020
2025
2032
of Social Security — is not a
Trust funds exhausted in 2032
means in and of itself for the
Source: 1998 trustees' report
government to accumulate
assets. It certainly establishes
claims against the government
for the Social Security system,
1 P.L. 103-296 requires the Secretary of the Treasury to issue “physical documents in the form
of bonds, notes, or certificates of indebtedness for all outstanding Social Security Trust Fund
obligations.” Under prior practice, trust fund securities were recorded electronically.

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but the Social Security system is part of the government. Those claims are not resources
that the government has at its disposal to pay future Social Security benefits.
What Then is the Purpose of the Trust Funds?
Generally speaking, the federal securities issued to any federal trust fund represent
“permission to spend.” As long as a trust fund has a balance of securities posted to it, the
Treasury Department has legal authority to keep issuing checks for the program. In a
sense, the mechanics of a federal trust fund are similar to those of a bank account. The
bank takes in a depositor’s money, credits the amount to the depositor’s account, and then
loans it out. As long as the account shows a positive balance, the depositor can write
checks that the bank must honor. In Social Security’s case, its taxes flow into the
treasury, and its trust funds are credited with federal securities. The government then uses
the money to meet whatever expenses are pending at the time. The fact that this money
is not set aside for Social Security purposes does not dismiss the government’s
responsibility to honor the trust funds’ account balances. As long as they have balances,
the Treasury Department must continue to issue Social Security checks. The key point
is that the trust funds themselves do not hold financial resources to pay benefits — rather,
they provide authority for the Treasury Department to use whatever money it has on hand
to pay them.
The significance of having trust funds for Social Security is that they represent a
long-term commitment of the government to the program. While the funds do not hold
“resources” that the government can call on to pay Social Security benefits, the balances
of federal securities posted to them represent and have served as financial claims against
the government — claims on which the treasury has never defaulted, nor used directly as
a basis to finance anything but Social Security expenditures.
Is This Trust Fund Arrangement Really Different From That Used by
Other Programs of the Government? Doesn’t the Treasury Department
Maintain Accounts for Them as Well?
The Treasury Department maintains accounts for all government programs. The
difference is that many other programs, particularly those not accounted for through trust
funds, get their operating balances — i.e., their permission to spend — through the annual
appropriations process. Congress must pass legislation (an appropriations act) each year
giving the Treasury Department permission to expend funds for them. In technical jargon,
this permission to spend is referred to as “budget authority.” For many programs
accounted for through trust funds, annual appropriations are not needed. As long as their
trust fund accounts show a balance of federal securities, the Treasury Department has
“budget authority” to expend funds for them.
Another difference is that a trust fund account earns interest, since it is comprised
of federal securities. In the case of the Social Security trust funds, the interest is equal to
the prevailing average rate on outstanding federal securities with a maturity of 4 years or
longer. This interest is credited to the trust funds twice a year (on June 30 and December
31) by issuing more securities to them. So in effect, a trust fund account can
automatically build future “budget authority” for the program, but other accounts,
dependent on annual appropriations, cannot.

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Does Taking Social Security Out of the Federal Budget Change Where
the Surplus Taxes Go?
Legislation enacted in 1990 (the Budget Enforcement Act, included in P.L. 101-508)
removed Social Security taxes and benefits from calculations of the budget. In large part
this was done to prevent Social Security from masking the size of federal budget deficits
and to protect it from budgetary cuts. It was based on the supposition that Congress
would act differently in trying to reduce budget deficits if Social Security surpluses were
not counted in reaching the budget totals; i.e., that Congress would ignore Social Security
in devising the Nation’s overall fiscal policies. It was not done to change where Social
Security taxes go. The federal budget is not a cash management account. It is simply a
summary of what policymakers want the government’s financial flows to be during any
given time period. Whether this summary is presented in a unified or fragmented form
will not in and of itself change how much money the government receives and spends, and
it will not alter where federal tax receipts of any sort go. Social Security taxes will go
into the treasury regardless of whether the program is counted in the budget. Social
Security taxes will go elsewhere only if Congress decides they will go elsewhere.
Are Surplus Social Security Taxes Giving the Government More Money
to Spend?
The fact that surplus Social Security taxes are used by the government to meet other
financial commitments does not necessarily mean that the government has more money
to spend than it otherwise would. Decisions about Social Security and the finances of the
rest of the government have not been made in isolation of one another and those decisions
have had overlapping influences. Increases in Social Security taxes may have made it
more difficult for Congress to raise other forms of taxes. For instance, Social Security
taxes were raised in 1977 to shore up the program’s financing, but the following year
Congress enacted reductions in income taxes to offset the impact of these hikes.
Similarly, the Earned Income Tax Credit (EITC), which reduces incomes taxes or permits
a refundable credit to be paid to low-income workers, is intended in part to offset the
Social Security tax bite. Hence, other taxes might have taken the place of the surplus
Social Security taxes if Social Security tax rates were lower than they are now. Thus,
whether these surplus taxes are allowing the government to spend more is largely
conjecture.
Are Surplus Social Security Taxes Allowing the Government To
Borrow Less From the Public?
Today, the government is spending more than it is taking in through taxes, and it
covers the shortfall by borrowing money. No single activity of the government
determines the size of this shortfall. To say surplus Social Security taxes are reducing the
amount that must be borrowed from the public assumes that all other spending and
taxation decisions have been made without any regard for Social Security’s income and
outgo, and vice versa. If increases in Social Security taxes over the past decade have
caused other taxes to be reduced or kept them from rising, they may have added little to
the government’s total revenues. By the same token, when Social Security’s taxes are less
than its expenditures — as they were for all but 5 fiscal years after 1957 and through 1984

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— it is not clear that this shortfall causes the government to borrow more than it would
otherwise. Government borrowing from the public is not clearly linked to any particular
aspect of what the government does. It borrows as it needs to, for whatever obligations
it has to meet. Thus, whether surplus Social Security taxes are currently allowing the
government to borrow less from the public is largely conjecture.
Isn’t There Some Way To Actually Save the Social Security Surpluses?
Perceiving that surplus Social Security taxes simply give the government more
money to spend, people sometimes ask why they can not be invested in stocks or bonds.
They feel that this would really save the money for the future.
Actually, the surplus Social Security taxes being collected today are not the means
through which much of the future cost of the system will be met. Most of today’s taxes
are used to cover payments to today’s retirees (in 1998 the system’s taxes will amount to
an estimated $435 billion; its expenditures, $383 billion). At their peak in 2012, the
balances of the Social Security trust funds are expected to equal only 3 1/4 years’ worth
of payments. Thus, the future costs of the system will be met largely through future
taxation, as is the case today. The promise of future benefits rests primarily on the
government’s ability to levy taxes in the future, not on the balances of the trust funds.
The more immediate concern about investing the surplus taxes elsewhere is that
doing so would reduce the government’s revenues. How would the government make up
this loss? What other taxes would take their place, what spending would be cut, or would
the government simply borrow more money from the financial markets?
In a sense, the concept of investing surplus Social Security taxes in private
investments is only half an idea. If the government borrowed money from the financial
markets to make up the loss, it simply would be putting money into the markets with one
hand and taking it back with another. Thus, on balance, it would not have added any new
money to the Nation’s pool of investment resources. If, on the other hand, the government
were to reduce its spending or raise other taxes, it would not have to borrow any new
funds (or it would borrow less than the full amount of Social Security money it diverted
to the markets). This presumably would result in a net increase in savings in the
economy. The bottom line is that it is not simply how surplus Social Security taxes are
invested that determines whether or not real savings is created. It is the steps that fiscal
policymakers take to reduce the government’s overall draw on financial markets that
really matter.
FOR ADDITIONAL READING
See: CRS Report 88-709, The Social Security Surplus: A Discussion of Some of the
Issues, by David Koitz and CRS Report 91-129, Social Security: Investing the Surplus,
by Geoffrey Kollmann. For a shorter discussion, see CRS Report 95-543, The Financial
Outlook for Social Security and Medicare, by David Koitz and Geoffrey Kollmann; CRS
Report, 98-195, Social Security Reform: How Much of a Role Could Private Retirement
Accounts Play? by David Koitz; and CRS Report 95-206, Social Security’s Treatment
Under the Federal Budget: A Summary, by David Koitz.

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