I’ve heard about it for much of my life, but didn’t really develop much of an understanding.  Now that I’m a few short years away from the age when most Americans retire, however, it behooves me to get a much grasp on what we commonly refer to as the Social Security Trust Fund. I’ll keep it basic and brief this time, and save more detailed information and analysis for future columns.

What Is It?

At the most basic level, the Social Security Trust Fund is a financial reserve established by the U.S. government to support the Social Security program.  The trust fund is an accounting mechanism rather than a physical bank account, and its purpose is to ensure the program’s long-term financial sustainability. The funds provide cash benefits for the elderly and disabled, as well as spouses and dependents.

How Is It Funded?

The reserve is funded primarily through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages (up to the taxable maximum of $168,600). The self-employed pay the full 12.4 percent.

There are three additional, smaller sources of income for the fund.

1. Taxation of Social Security Benefits: A portion of Social Security benefits received by certain individuals may be subject to federal income tax. The taxes collected on these benefits are added to the trust fund.
2. Interest on Trust Fund Investments: The trust fund invests its surplus funds in special-issue U.S. Treasury bonds. The interest earned on these investments also go into the trust fund.
3. Taxation of Social Security Earnings: If a person continues to work while receiving Social Security benefits before reaching full retirement age, a portion of their earnings may be subject to taxation. The taxes collected on these earnings are funneled to — you guessed it — the Social Security Trust Fund.

Who Runs It?

The Social Security Trust Fund is overseen by a board of trustees, which includes the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and two public trustees appointed by the President and confirmed by the Senate. The trustees provide an annual report on the financial status of the trust fund to the President and Congress.

What’s Its History?

The Social Security Act was signed into law by President Franklin D. Roosevelt in 1935 as part of his New Deal initiatives. It created a comprehensive social insurance program to provide economic security for retired workers, the unemployed, and those with disabilities. The program aimed to address the challenges of poverty and insecurity faced by older Americans during the Great Depression.

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So there you have it. That’s a brief synopsis of the Social Security Trust Fund. They’ll be more to come in the weeks ahead.