Order Code 94-593 EPW
Updated August 28, 2001
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
Domestic Social Policy 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 (as a result of their authorization 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 revenue, 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. And once received, these taxes become
indistinguishable from other monies the government takes in. They are accounted for
separately by the issuance of federal securities to the Social Security trust funds — which
basically involves making bookkeeping entries among Treasury Department accounts.
However, the trust funds themselves do not hold the money; they are simply accounts.
Similarly, benefits are not paid from the trust funds, but from the treasury, and as with
Social Security receipts, the money used is indistinguishable. The treasury uses whatever
funds it has on hand. As the checks are paid, the payments are reflected by writing off
an equivalent amount of federal securities from 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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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 self-
2001
5.30
.9
6.20
1.45
7.65
15.3
employment income (FICA and
The rate for the self-employed is the same as the combined
employee/employer rate; however, only 92.35% of net self-
SECA taxes). The FICA tax is
employment earnings is taxable and half of the taxes so computed is
levied on a worker’s earnings
deductible for income tax purposes.
and is paid both by employees
and employers; the SECA tax is
levied on self-employment
income. More than 95% of the work force is required to pay them. Non-work 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 2001, the OASDI portion is levied on earnings up
to $80,400. This maximum level of taxable earnings 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 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 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 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 or buy
up outstanding federal debt held by the public. 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
1 P.L. 103-296 requires the Secretary of the Treasury to issue “physical documents” to the trust
funds. Under prior practice, trust fund securities were only recorded electronically.

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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 equal to the value of the securities. The Social Security trustees project that the
balances of the trust funds would exceed $1.2 trillion by the end of CY 2001. (See the
following table.)
Projected Social Security Trust Funds’ Income, Outgo, and
End-of-Year Balances
Calendar
Tax Income
Interest
Total Income
Outgo
End-of-year
Year
Income
balance
($s in billions)
2001
532
73
604
439
1,215
2005
650
118
768
540
2,035
2010
831
198
1,029
738
3,379
2015
1,059
295
1,354
1,058
4,888
2020
1,336
374
1,711
1,518
6,105
2025
1,683
405
2,089
2,103
6,491
2030
2,121
355
2,475
2,808
5,508
2035
2,676
189
2,864
3,624
2,599
Source: 2001 Social Security Trustees’ Report, March 19, 2001.
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, 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 against the government. When the government
issues a security to one of its own accounts, it hasn’t purchased anything or established a
claim against some other person or entity. It is simply creating an IOU from one of its
accounts to another. Hence, the building up of federal securities in federal trust funds —
like those of Social Security — is not a means in and of itself for the government to
accumulate assets. It certainly establishes claims against the government for the Social
Security system, but the 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

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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. 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 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?
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.
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 calculation of the budget totals. In large
part this was done to prevent Social Security from masking the size of federal budget
deficits and to protect it from benefit cuts motivated by budgetary concerns. 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

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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. Thus, whether these surplus
taxes are allowing the government to spend more is largely conjecture.
Are Surplus Social Security Taxes Allowing the Government To
Reduce Its Publicly-Held Debt?
Today, the government has outstanding debts to the public totaling approximately
$3.3 trillion, an amount which has been declining in recent years because of unified budget
surpluses. When the Treasury Department takes in more than it spends, the excess
receipts are used automatically to retire outstanding federal debt. In short, the Treasury
Department reduces the outstanding amount of the government’s past borrowings.
No single activity of the government determines the amount of a budget surplus. To
say surplus Social Security taxes are reducing the amount of the government’s publicly-
held debt assumes that all other past 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 in the past caused other taxes to be reduced or kept 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 five fiscal
years from 1958 to1984 — 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
now allowing the government to reduce its past debt is largely conjecture.

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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’t 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
Social Security Trust Funds, End of
today are not the means through
Year Balances ($s in trillions)
which much of the future cost of
the system will be met. Most of
today’s taxes are used to cover
7.0
payments to today’s retirees (in
2001 the system’s taxes are
4.9
estimated to be $532 billion; its
expenditures, $439 billion). At
2.8
their peak in 2024, the balances of
Trust funds exhausted in 2038
the Social Security trust funds are
0.7
expected to equal only 3 years’
worth of payments. The promise
-1.4
of future benefits rests primarily on
2000
2005
2010
2015
2020
2025
2030
2035
2038
the government’s ability to levy
Source: 2001 trustees' report
taxes in the future, as is the case
today, 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 keep its outstanding debt higher than it otherwise would be?
In a sense, the concept of investing surplus Social Security taxes in private
investments is only half an idea. If the government kept its publicly-held debt higher than
it otherwise would be to make up the loss, it simply would be putting money into the
markets with one hand and taking it back with another. 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 to make up for the loss,
it would not have to keep its outstanding debt as high. 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 CRS reading, see: Issue Brief IB98048, Social Security Reform, by David Koitz;
Report 88-709, The Social Security Surplus: A Discussion of Some of the Issues, by David Koitz; Report
91-129; Social Security: Investing the Surplus, by Geoffrey Kollmann; and Report RL30571, Social
Security Reform: the Issue of Individual versus Collective Investment for Retirement, by David Koitz.
For a shorter discussion, see Report 95-543, The Financial Outlook for Social Security and Medicare, by
David Koitz and Geoffrey Kollmann; Report, 98-195, Social Security Reform: How Much of a Role Could
Private Retirement Accounts Play? by David Koitz; Report 95-206, Social Security’s Treatment Under

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the Federal Budget: A Summary, by David Koitz; and Report RS20165, The Social Security “Lock Box,”
by David Koitz.

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