A Brief Look At The Social Security Trust Fund
When the federal government of the United States receives excess paid-in contributions from workers or employees into the Social Security system, it goes into the Social Security Trust Fund. This happens only after it is determined that these funds are not needed for benefit payments to senior citizens, their survivors or the disabled. After all payouts have been covered, the remaining money is saved for future shortfalls in contributions received in order to maintain consistent payments to those who qualify. This money is saved as securities that will be liquidated when necessary in a fund called the Social Security Trust Fund.
Social Security Trust Fund Structure
The Social Security Administration is responsible for the management of the fund along with the federal government’s debt obligations related to traditional Social Security benefits. There are two funds with the larger being the Old-Age and Survivors Insurance Trust Fund. This fund keeps in trust the money that the federal government needs to pay future benefits for retirees and survivors of retirees.
The other fund is smaller and it’s for the disabled. Called the Disability Insurance Trust Fund, this money is used by the federal government to pay those people who are judged to be disabled and no longer capable of holding down a job. This fund also covers their dependents and spouses.
Social Security Trust Fund History
Up until the early 1980s, the Social Security system was primarily based upon payments made to the retiring workforce by payments into the system by current working adults. However, in the early 1980s, the projections made by the Social Security Administration found that payroll taxes were not going to be enough to cover benefits paid out opening up the possibility of benefit cuts due to a shortfall in funds.
The federal government requested the services of Alan Greenspan, before he was named Federal Reserve Chairman, to head up a national commission to study Social Security problems and come up with a reform plan to maintain payments in perpetuity. The commission found that in order to increase the fiscal health of the Social Security system, payroll taxes needed to be increased in order for funds to exceed the required funds necessary to take care of near-term payments.
In addition, other recommendations made by the Greenspan Commission caused a reserve trust fund to be created which accumulated excess capital so that funding would continue to exceed expenditures until 2017 or 2025 depending on which economist you consulted. In addition, if the American economy showed growth, it was entirely conceivable that there would be an excess amount in the fund indefinitely.
On the other hand, if there was a downturn in the economy, the trust fund would allow retirees and the disabled to receive continued and consistent payments because the federal government could withdraw funds from the Social Security Trust fund until 2042 according to the Social Security Administration, or 2052 according to the Congressional Budget office when the fund would be completed depleted.
What is the difference between Social Security and a private pension?
The Social Security system and private pensions are alike in that they provide retirees with guaranteed income upon retirement. They differ in how they are administered. Social security is overseen by the federal government, whereas private pensions are the sole responsibility of the companies that provide them.
For generations, American workers have relied on a combination of pension funds and Social Security for financial security in their retirement years. In the past decade, both systems have come under scrutiny.
Pensions consist of a combination of employer or employee contributions. Some pensions involve a combination of funds from both the employee and his company. The monies are typically invested in stocks, bonds or mutual funds. The objective is for the portfolio to accumulate investment wealth so that, after a number of years, the fund can serve as income for the worker throughout their retirement.
Types of pensions include a defined benefit plan, 401k plans, profit sharing and money purchase plans. The defined benefit plan guarantees the worker a specific monthly income upon retirement. 401k’s, which have become hugely popular, combine employer and employee contributions in a portfolio that is invested in mutual funds. Profit sharing gives the worker a stake in the ownership of their company and money purchase plans involve strictly company contributions.
Many pensions have shifted from money purchase plans to profit sharing and 401k plans. Many companies have altered their philosophy on pensions and are encouraging a combination of risk from their business and the worker through mutual contributions.
Social Security is taken from every American worker regardless of age, employment or income. The government uses the money to establish, in a sense, trust funds that cover expenses for retirement and various disability or survivor insurance. The government’s promise is that every worker will eventually benefit from the program when they retire or are disabled and prevented from working. Most working Americans begin to receive Social Security payments when they reach age 63.
In addition to money taken out of a worker’s paycheck, the worker’s employer has to make a matching contribution to the Social Security program. Therefore, what the worker sees on their paycheck as their contribution is only half the money.
Much debate in recent years has focused on whether or not Social Security can survive the retirement of the Baby Boomer generation. Americans live longer than ever before and many experts feel the retiring Boomers will drain the system of funds within 20 years. Many in the industry maintain that Social Security will not be available to workers under the age of 40.
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