Order Code 94-593 EPW
Updated September 8, 2003
CRS Report for Congress
Received through the CRS Web
Social Security: Where Do Surplus Taxes Go
and How Are They Used?
Domestic Social Policy Division
Most of the costs of the Social Security program are financed by the payroll taxes
workers pay on their wages and self-employment income. A smaller amount is financed
by part of the income tax some recipients pay on their Social Security benefits. These
taxes are paid to the federal government and, along with other forms of revenue,
become part of the government’s operating cash pool, commonly referred to as the U.S.
treasury. Once received, they become indistinguishable from other monies received by
the government. The trust funds receive credit for these monies in the form of federal
securities issued to the Social Security trust funds. When more Social Security taxes are
received than spent, the extra money is not held in the trust funds, but remains in the
treasury. Instead, the “surplus” receipts are credited to the Social Security program by
increasing the amount of securities posted to the Social Security trust funds.
Similarly, benefits are not paid from the trust funds, but from the treasury, and as
with Social Security receipts, the money used is indistinguishable from that used to
make other government expenditures. The treasury simply uses whatever funds it has
on hand. As the checks are paid, the payments are reflected by deducting 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 lends it out. As long as the account shows a balance, the depositor can write checks
that the bank must honor. The trust fund balances, like those of a bank account,
represent a form of IOU, a promise that, when money is needed to pay Social Security
benefits, the government will obtain resources equal to the value of the securities. The
surplus taxes themselves are commingled with all other sources of government revenue
and used for any of the many functions of government.
Congressional Research Service ˜ The Library of Congress
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
expenses) is provided by a
flat-rate tax levied on
The rate for the self-employed is the same as the combined
employee/employer rate; however, only 92.35% of net self-employment
earnings is taxable and half of the taxes so computed is deductible for
income tax purposes.
Contributions Act) tax is
levied on a worker’s
earnings and is paid both by
employees and employers. The SECA (Self-Employment Contributions Act) tax is levied
on earnings from self-employment. More than 95% of the work force is covered by
Social Security and therefore must pay FICA or SECA taxes. Income not derived from
work is not covered by Social Security and is exempt from these taxes. Both the FICA
and SECA rates have three components: one for Old Age and Survivors Insurance
(OASI), another for Disability Insurance (DI), the two of which together comprise what
is commonly thought of as Social Security, and a third for the Hospital Insurance (HI)
portion of Medicare. In 2003, the OASDI portion is levied on earnings up to $87,000.
This maximum level of taxable earnings rises annually to reflect increases in average
wages in the economy. The HI portion is levied on all earnings. In addition, the Social
Security and Medicare Hospital Insurance trust funds are financed by income taxes some
recipients pay on their Social Security benefits.
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 into thousands of depository accounts maintained by the
government with financial institutions across the country. Along with other forms of
revenues, Social Security taxes become part of the government’s operating cash pool, or
what is commonly referred to as the U.S. treasury. 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
Yes. When more Social Security taxes are received than spent, the money does not
sit idly in the treasury, but is used to finance other operations of the government or buy
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.
up outstanding federal debt held by the public. The surplus is then reflected in a higher
balance of federal securities posted to the trust funds. These securities, like those sold to
the public, are legal obligations of the government. 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 equal to the
value of the securities. The Social Security trustees project that the balances of the trust
funds will be more than $1.5 trillion by the end of CY 2003. (See the following table.)
Projected Social Security Trust Funds’ Income, Outgo, and
($s in billions)
Source: 2003 Social Security Trustees’ Report, March 17, 2003.
What is the Nature of the Federal Securities Issued to the Trust
They are very similar to the federal securities that individuals and other entities buy.
While generally the securities issued to the trust funds are not marketable, they 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. However, unlike most assets that represent a financial claim
against some other person or entity, when the government issues a security to one of its
own accounts, it is basically 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.
Then What 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 the trust funds remain credited with a positive balance
of 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 lends 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 diminish 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 do not hold resources to pay benefits; rather, they
provide authority for the Treasury Department to use whatever money it has on hand to
The significance of the trust funds is that they represent a long-term commitment of
the government to the Social Security 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.
However, many programs, particularly those not accounted for through trust funds, are
required to 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 these programs’ outlays.
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 their outlays.
Another difference is that, because it consists of federal securities, a trust fund
account earns interest. 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 four
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 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?
Just because surplus Social Security taxes are used by the government to meet other
financial commitments does not necessarily mean that it 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, in 1977 Social Security
taxes were raised to shore up the program’s financing, but the following year Congress
enacted reductions in income taxes to offset the impact of these rate increases. 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 Reducing the Government’s
When the government takes in less than it spends, the treasury finances the shortfall
by selling federal securities to the public, increasing its publically-held debt. Conversely,
when the government takes in more than it spends, the excess receipts automatically are
used to retire this debt. In other words, budget surpluses have the effect of reducing the
outstanding amount of the government’s past borrowing from the public.
No single activity of the government determines the amount of a budget surplus or
deficit. To say surplus Social Security taxes are keeping the amount of the government’s
publicly-held debt lower than it otherwise would be 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 reducing the publically held debt
is largely conjecture.
Is There Some Way to Actually Save the Social Security
Perceiving that surplus Social Security taxes are being spent on other government
programs rather than being saved, people sometimes ask why the surplus taxes cannot be
invested in stocks or bonds. They feel that this would really save the money for the
In fact, 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
2003 the system’s taxes are
estimated to be $555 billion; its
expenditures, $478 billion). At
their peak in 2027, the balances of
the Social Security trust funds are
expected to equal only 3.5 years’
worth of payments. The promise
of future benefits rests primarily
on the government’s ability to levy
taxes, as is the case today, not on
the balances of the trust funds.
Social Security Trust Fund Balances,
End of Calendar Year ($ in Trillions)
Balances Peak at $7.5 Trillion in 2027
Trust Funds Are Exhausted in 2042
S ource: 2003 S ocial S ecurity Trustees' Report
The more immediate concern about investing the surplus taxes elsewhere is that
doing so would reduce the government’s cash pool. How would the government make
up this loss? Would it raise taxes, cut spending, or 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 borrowed from the public to make up
the loss, it simply would be putting money into the markets with one hand and taking it
back with the other. 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, the additional investment of surplus
taxes in the private market presumably would result in a net increase in national savings.
Thus, the basic issue is not whether real savings would be created if surplus Social
Security taxes were invested in private markets; rather, it is how fiscal policymakers
For additional CRS reading, see: CRS Issue Brief IB98048, Social Security Reform, by Geoffrey
Kollmann and Dawn Nuschler, CRS Report 91-129; Social Security: Investing the Surplus, by Geoffrey
Kollmann; and CRS Report RL30571, Social Security Reform; the Issue of Individual versus Collective
Investment, by David Koitz. For a shorter discussion, see CRS Report 95-543, The Financial Outlook for
Social Security and Medicare, by Geoffrey Kollmann and Dawn Nuschler; CRS Report 95-206, Social
Security’s Treatment Under the Federal Budget: A Summary, by Dawn Nuschler; and Report RS20165,
Social Security and Medicare “Lock Boxes,” by David Koitz, Geoffrey Kollmann and Dawn Nuschler.