How Social Security Works

Every once in a while I read comments by people about Social Security and I am appalled at the confusion about how Social Security works. 

It was never intended to work like a 401K where the money is put into a dedicated account. Social Security is a payroll tax levied on both the employer and employee. The money goes toward paying current Social Security benefits. Any excess funds (positive cash flow) go into a dedicated trust fund which is invested in Special Issue Treasury Bonds (effectively government IOUs) with a variable interest rate based upon the going bond rate. It's invested in Treasury Bonds because that is considered the safest type of investment.

If not enough money is collected in payroll taxes to pay current obligations (negative cash flow) then bonds are cashed in to make up the difference. Once the trust fund is exhausted then benefits must be cut since money from the general fund can't be used to fund Social Security without a change to the law.

From time to time the Social Security cash flow needs to be adjusted due to changing demographics either by reducing outlays, increasing receipts or some combination of the two. This is not a big surprise. Everyone knew this was a requirement. The last time the cash flow was adjusted was in 1983 when both the retirement age and payroll taxes were increased. Congress waited until a month before the trust fund was exhausted before it did anything.

Social Security had a positive cash flow until 2020 so the trust fund was growing. In 2020 the trust fund held $2.9 trillion. Since then Social Security has been selling bonds to meet its payment obligations. At the end of 2023 the trust fund held a little under $2.8 trillion. The latest Trustee Report estimates that the trust fund will be exhausted in 2036.

Any bill that either increases benefits or cuts revenue would bring that date in closer which is what Roy is acknowledging here. Trump's idea of eliminating  income taxes on Social Security benefits, while it would help many people, would also reduce Social Security revenues and exhaust the trust fund sooner because those taxes also go into the trust fund.

So here's the deal. Nobody "stole" from Social Security. The money is invested in Treasury Bonds which pay interest. It's like someone buying a CD. They're effectively lending the bank money and the bank pays them interest. Whether Social Security could get a better rate of return is a point of contention. But it probably couldn't without more risk as rate of return and increased risk tend to go together,