In the fiscal year that ended on September 30, the Social Security Trust Fund, formally known as the Old-Age and Survivors Insurance (OASI) Trust Fund, experienced a significant shift in its financial health. Contributions to the fund increased by 5.6%, reaching a total of $1.1 trillion, thanks to employment growth and wage increases. Overall, total income rose by 5.3% to $1.21 trillion, primarily supported by these contributions, alongside an unchanged interest income of approximately $63 billion and a slight increase in benefit taxation, which brought in an additional $3 billion. However, the fund’s expenditures grew even faster, with total outflows jumping by 8.5%, reaching a record of $1.30 trillion. This resulted in a budget deficit of $91.5 billion for the fiscal year, marking the largest deficit recorded and the fourth consecutive year of deficits for the Trust Fund. The total balance of the Trust Fund fell to $2.6 trillion, creating concern about its sustainability going forward.
The outflow of funds was largely attributed to an increase in benefit payments, which saw a rise of $102 billion, totaling $1.29 trillion. This increase was influenced by a growing number of retirees drawing benefits, coupled with cost-of-living adjustments (COLAs) for the remaining months of 2023 and an impending COLA for the following year. With a backdrop of increasing retirements among Baby Boomers, the pressures on the Fund’s resources appear set to continue. Additionally, the Trust Fund allocated $5.9 billion to the Railroad Retirement Program and incurred administrative expenses of $4.8 billion, which, while rising slightly, constituted a minimal fraction of the overall budget.
Historically, the Social Security Trust Fund operated surpluses in 30 of the past 35 years, accumulation totaling approximately $2.6 trillion. However, the trend has shifted in recent years, leading to five consecutive years of deficits amounting to $225 billion. As the Trust Fund continues to face financial challenges, it has relied heavily on its reserves, with the latest deficit causing its balance to shrink by 3.4%. This reliance raises sustainability concerns, particularly as the current trajectory indicates that the fund may face depletion within the next decade if no corrective measures are implemented. At this point of insolvency, benefits could either be reduced to align with income or would require federal budget interventions to bridge the income gap.
At the conclusion of the fiscal year, the Trust Fund held $2.39 trillion in interest-bearing Treasury securities and $197 billion in short-term cash-management securities. This investment strategy allows the Trust Fund to mitigate risks typically associated with fluctuating market conditions, as these securities are not traded in secondary markets. The Trust Fund adopts a conservative investment approach, carefully managing its assets to achieve ultra-low administrative expenses that amount to just 0.17% of the total balance. However, the interest income generated from these investments has been declining, with the Trust Fund earning $63 billion in interest for the fiscal year, drastically down by 42% from the peak earnings seen in 2010.
Much of the decline in interest income can be traced back to the Federal Reserve’s policy measures, particularly its approach to interest rates and quantitative easing, which have kept rates artificially low. The replacement of higher-interest securities with lower-yield investments has further exacerbated the income shortfall. If the Trust Fund’s securities had maintained an average yield of 4.5%, a more historical benchmark, the Fund would have generated significant additional income, greatly reducing the current deficit to levels that would have resulted in a surplus. The ongoing rise in average interest rates could slowly remedy this situation, evidenced by an increase to 2.52% during the fiscal year due to the maturation of low-yield securities.
This financial state of the Social Security Trust Fund necessitates careful scrutiny and prompt action. Although the current deficit represents a manageable percentage of the broader economy, without modifications, it is projected that the Trust Fund may run out of assets in about ten years. Future adjustments could include proposals to tweak benefits or modify taxation strategies that could help stabilize the Fund’s finances. Congressional discussions around these adjustments have historically been slow-moving. Yet, it is essential for lawmakers to consider these various proposals to prevent dire consequences for beneficiaries. The fund’s history suggests that it has the capacity for recovery through responsive tweaks that balance income and outgo, reinforcing that proactive measures will be crucial for sustaining the Social Security program for future generations.
