How Social Security Works

 I continue to be amazed at how many people have a mistaken impression of how Social Security operates.

Legally, Social Security is required to invest in special-issue US Treasury Bonds. And no, Social Security revenue NEVER contributes to the General Fund, so it has absolutely nothing to do with the deficit or the debt. Here's how Social Security operates: 

All revenue collected is first used to pay current benefits. If there is a surplus, it goes into the Social Security Trust Fund which, by law, is invested in special-issue US Treasury Bonds because it is considered the safest investment and CAN NEVER LOSE MONEY. These aren't just IOUs, but blue chip financial investments. These bonds collect interest which also goes into the Social Security Trust fund. What is special about these bonds is that they can be redeemed at anytime at par value. In other words, they're basically cash collecting interest.

If there is not enough to cover current benefits, then first interest, and then bonds, from the Trust Fund are used to meet the shortfall. 

Up until 2010 Social Security was taking in more money than it was paying out, so the Trust Fund was growing and all interest was reinvested back into the fund.

After 2010 Social Security used interest from the Trust Fund to make up the shortfall in tax revenue rather than investing that interest back into the Trust Fund. The Trust Fund reached a maximum size of about $2.9 trillion in 2020. 

Starting in 2021 the shortfall exceed both the tax revenue and the Trust Fund interest so Social Security began cashing in bonds to make up the shortfall. The Trust Fund currently contains approximately $2.56 trillion.

Unless either (1) more revenue is added or (2) expenses are reduced or (3) some combination of more revenue and reduced expenses is implemented, the Trust Fund is expected to be exhausted in 2032. At that time benefits will have to be reduced by about 22% to match what's being collected in tax revenues.