Social Security: Trust Fund Investment
Practices
Dawn Nuschler
Specialist in Income Security
October 27, 2010
Congressional Research Service
7-5700
www.crs.gov
RS20607
CRS Report for Congress
P
repared for Members and Committees of Congress
Social Security: Trust Fund Investment Practices
Summary
The Social Security Act has always required surplus Social Security revenues (revenues in excess
of the program’s expenditures) to be invested in U.S. government securities (or U.S. government-
backed securities). In recent years, however, attention has been focused on alternative investment
practices in an effort to increase the interest earnings of the trust funds, among other goals. This
report describes trust fund investment practices under current law.
Congressional Research Service
Social Security: Trust Fund Investment Practices
Contents
Background ................................................................................................................................ 1
Issues.......................................................................................................................................... 2
Contacts
Author Contact Information ........................................................................................................ 3
Congressional Research Service
Social Security: Trust Fund Investment Practices
Background
Social Security is financed primarily by payroll and self-employment taxes, as well as by a
portion of the proceeds from the income taxation of Social Security benefits. The revenues are
deposited in the U.S. Treasury. Social Security benefits and administrative expenses are also paid
from the U.S. Treasury. By law, if Social Security revenues exceed expenditures, the “surplus” is
credited to the Social Security trust funds in the form of U.S. government securities. The money
itself, however, is used to pay for whatever other expenses the government may have at the time.
There is no separate pool of money set aside for Social Security purposes. That is not to say that
the trust funds are ephemeral—as long as the trust funds show a positive balance, they represent
the authority and an obligation for the U.S. Treasury to issue benefit checks during periods when
the program’s expenditures exceed revenues. At the end of calendar year 2009, the trust funds
were credited with holdings of $2.5 trillion.1 By the end of calendar year 2020, trust fund assets
are projected to reach $3.1 trillion (in constant 2010 dollars).2 Section 201 of the Social Security
Act provides the following guidelines for trust fund investment:
(1) Funds not immediately in demand for benefits or administrative expenses are to be invested
in interest-bearing obligations guaranteed as to both principal and interest by the United
States.3
(2) Obligations are to be purchased at issue at the issue price or at the market price for
outstanding obligations.
(3) The Managing Trustee of the Social Security trust funds (the Secretary of the Treasury) is
required to invest in special “nonmarketable” federal public-debt obligations—special issues
to the trust funds that are not available to the general public—except where he or she
determines that the purchase of marketable federal securities is “in the public interest.”
(4) Special issues shall have maturities fixed with due regard for the needs of the trust funds and
will pay a rate of interest, calculated at the time of issue, equal to the average market yield
on all marketable interest-bearing obligations of the United States that are not due or
callable (redeemable) for at least four years.
(5) Marketable federal securities purchased by the trust funds may be sold at the market price
and special issue obligations may be redeemed at par plus accrued interest (without penalty
for redemption before maturity).
1 The Social Security program has two separate trust funds—the Old-Age and Survivors Insurance (OASI) trust fund
and the Disability Insurance (DI) trust fund. The amounts cited in this report are for the OASI and DI trust funds
combined. Historical trust fund data are available on the Social Security Administration (SSA) website at
http://www.ssa.gov/OACT/STATS/table4a3.html.
2 Projected trust fund assets are shown in The 2010 Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Insurance Trust Funds, August 5, 2010, table VI.F7 (intermediate assumptions),
available on the SSA website at http://www.ssa.gov/OACT/TR/2010/lr6f7.html.
3 Although not specifically authorized by the Social Security Act, the Attorney General has ruled that certain federally
sponsored agency obligations may be purchased by the trust funds. Such securities include those issued by the Federal
National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), and other
federal credit entities. Currently, the trust funds do not hold such securities.
Congressional Research Service
1
Social Security: Trust Fund Investment Practices
The Treasury Department has determined that the purchase of marketable federal securities (i.e.,
public issues) would be in the public interest only when it might serve to stabilize the market for
Treasury issues. Because an “unstable market” would be characterized by falling bond prices,
purchases of marketable federal securities at these times would appear to be advantageous for the
trust funds. In practice, however, open market purchases have been rare. Although the trust funds
have held public issues in the past, the trust funds currently hold special issues only.4
The interest earned on these holdings is credited to the trust funds semiannually (on June 30 and
December 31), and it is done by issuing additional federal securities to the trust funds. In calendar
year 2009, net interest totaled $118.3 billion.5 The effective annual rate of interest earned on all
obligations held by the trust funds in calendar year 2009 was 4.9%.6 The interest rate earned on
special issues purchased by the trust funds in September 2010 was 2.125%.7
The maturity dates of newly issued special issues are set by a standardized procedure. Revenues
are invested immediately in short-term issues called certificates of indebtedness, which mature on
June 30 of each year. On June 30, certificates of indebtedness that have not been redeemed are
reinvested in longer-term special issue bonds. The maturities of these bonds range from 1 to 15
years—the goal is to have about one-fifteenth of them mature each year. This means that the
average maturity of these long-term bonds is about 7½ years.
Issues
While some critics have questioned whether the current investment policy has constrained the
earnings of the trust funds, over the years various advisory councils, congressional committees,
and other groups generally have endorsed it. It has been justified as a way to ensure safety of
principal and stability of interest, and as a way to avoid intrusion into private markets. It also has
been regarded as a way to avoid the political influences that would be inherent in investing
outside the U.S. government. Generally, the goal espoused has been to place the trust funds in the
same position as any long-term investor seeking a safe rate of return by investing in U.S.
securities, and neither advantage nor disadvantage the trust funds relative to these investors or
other parts of the government.
For most of the program’s history, interest income to the trust funds has not been a major factor in
program financing. In recent years, however, the increasing role of interest income, as well as
interest by some policymakers in preventing annual Social Security surpluses from being used for
other government spending purposes, have focused attention on alternative investment practices.8
4 The DI trust fund held a small amount of public issues until February 15, 2005. At the end of calendar year 2004,
public issues represented 0.002% of total investments held by the trust funds. Data on investments held by the trust
funds are available on the SSA website at http://www.ssa.gov/OACT/ProgData/investheld.html.
5 Data on trust fund receipts, including net interest, are available on the SSA website at http://www.ssa.gov/OACT/
STATS/table4a3.html#income.
6 Data on effective interest rates earned on assets held by the trust funds are available on the SSA website at
http://www.ssa.gov/OACT/ProgData/effectiveRates.html.
7 Data on nominal interest rates earned on special issues purchased by the trust funds are available on the SSA website
at http://www.ssa.gov/OACT/ProgData/newIssueRates.html.
8 The Social Security trust funds ran cash flow surpluses from 1984 to 2009. In August 2010, however, the Social
Security Board of Trustees projected that the Social Security trust funds would run cash flow deficits in calendar years
2010 and 2011, and again beginning in 2015 (under the intermediate assumptions). For more information on the
(continued...)
Congressional Research Service
2
Social Security: Trust Fund Investment Practices
For example, there have been proposals to replace the special issues held by the trust funds with
marketable federal securities, as well as proposals to allow surplus Social Security revenues or a
portion of trust fund assets to be invested in assets other than U.S. government obligations,
including equities.
Author Contact Information
Dawn Nuschler
Specialist in Income Security
dnuschler@crs.loc.gov, 7-6283
(...continued)
Trustees’ projections, see The 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Federal Disability Insurance Trust Funds, August 5, 2010, at http://www.ssa.gov/OACT/TR/2010/.
Congressional Research Service
3