How Social Security Functions – March 12, 2026

For the purposes of this conversation, our intention is to make a statement on how Social Security works in the context of explaining what some fear the majority of Americans do not know. Perhaps clear up a few misconceptions as it relates to a few stories in the news on Social Security “solvency” in the coming years.

A few quotes to kick this off…

“No matter what politicians promise, Social Security reform will not change the fact that your money is taken from your paycheck and sent to Washington, where it will be spent.” – Dr. Ron Paul, January 25, 2005 – Want to Reform Social Security? Stop Spending (article.)

“Of course the Republicans have long wanted to privatize Social Security and destroy it. But Social Security has been the most important and valuable social program in the history of the United States. For 75 years, it’s worked perfectly. It can pay out every nickel for the next 27 years, at which time it pays out 78 percent.” – Bernie Sanders, Feb 16, 2011 – Interview with PBS.

Initial Question – Who is right?

Technically, and at the time, they were right then and still mostly right today. And the answer falls entirely in the explanation of how Social Security functions day in and day out, and entirely by law.

Both were making political statements, to their respective audiences and viewers, for the express purpose of complaining about and attacking how the other side looks at Social Security. But they both know all too well how it functions.

So, what are the basics of Social Security functionality?

Fair warning, this is going to get very technical.

At a high level, Social Security is a federally ran “pay-as-you-go” fund and program that provides a financial safety net for retirees, people with disabilities, survivors of deceased workers, what have you. Funded by payroll taxes and paid out to qualifying beneficiaries.

Going a bit deeper, the Social Security “Trust Fund” is really just an accounting ledger kept up with by the Social Security Administration (SSA) and is audited by private third-party accounting firm Ernst & Young (this changes from time to time based on biding for the work.) The Office of the Inspector General (OIG) provides oversight, as the SSA Office of the Inspector General acts as the primary internal watchdog. Lastly, the Government Accountability Office (GAO) acts as the Congressional watchdog.

What is in that ledger is key to what so many do not understand.

The ledger itself is really just a collection, a complete listing, of special issued Intergovernmental Debt that is added to the ledger or removed from based entirely on the conditions at the time of payments to the Federal Government in taxes against the scheduled payments going out to dependents. Contrary to popular belief, there is no “cash” kept by the fund nor are there “individual accounts” for payers into the fund or beneficiaries paid from the fund.

In fact, taxes to the fund do not really go to the fund but rather are deposited right into the Federal Government general fund. Payments going out to beneficiaries are also paid right out of the general fund. It is everything on the backend, the function of accounting and ledgers, that tells us what the Social Security “Trust Fund” both holds and its “solvency” determinations.

Okay, so what in the absolute hell really happens?

Technically, and by law, every single cent that is paid to Social Security is immediately converted into a special issued type of Intergovernmental Debt. At that moment, in that transaction, several things happen.

First, the “split process” kicks in. Social Security logs the payments into the system but the cash itself is held by the US Treasury. The money never goes into Social Security, the US Treasury issues that Intergovernmental Debt calculated down to the penny for that transaction. All that happens for the Social Security Trust Fund is a ledger entry for that new Intergovernmental Debt as an asset (the US Treasury logs it as a liability.) That process happens every single day that taxes show up for Social Security purposes.

Second, another calculation is made for what is “immediately needed” to cover scheduled payments to Social Security beneficiaries that day. Because those payments go right out of the US Treasury general fund, they instantly “redeem” (or cashes in) enough of the Social Security Trust Fund held Intergovernmental Debt to cover those transactions. Again, calculated down to the penny.

The whole idea of surplus or deficit condition for the Social Security Trust Fund comes down to those two calculations. On that day, if more comes in as tax payments to Social Security against what goes out to beneficiaries then the Trust Fund has a net increase in Intergovernmental Debt held. Social Security Trust Fund has more in “assets” that day. If the exact opposite occurs that day, then the Social Security Trust Fund has less “assets” that day.

The money you pay in to Social Security as taxes on any given day is not really for you specifically, it ends up in the US Treasury general fund and used for both beneficiaries at that moment as well as everything else the Federal Government spends on. The term for it is unified accounting and it boils down to a method where all Trust Funds managed by the Federal Government do not really hold much other than IOUs issued by the US Treasury. The Federal Government.

Various nuances aside, that is really it.

Natural Question – What are the current conditions?

Since sometime in 2021, Social Security has been in a “cash-flow deficit” condition meaning more is paid out to Social Security beneficiaries than what comes in from taxation. From the above, you now know that means the total Intergovernmental Debt held by the Social Security Trust Fund is decreasing.

Look at it as Social Security is cashing out more older bonds than it receives in newer bonds for those transactions with the US Treasury each day.

On a very technical level there are some surprises, while every cent is technically “loaned” by the Social Security Trust Fund to the US Treasury first, the vast majority these days is loaned for only a few seconds before being cashed right back out to pay beneficiaries. Yes, you read that right, it comes down to a “Redemption Order” process that on paper is designed to benefit the Social Security Trust Fund. But for our conversation only the surplus (which no longer exists on an annual basis) becomes long-term intergovernmental debt.

In Federal Accounting practices, the US Treasury decision to cash out (redeem) newly issued intergovernmental debt before older debt is driven by a strict legal hierarchy designed to protect the Social Security Trust Fund’s long-term interest earnings.

The “Short-Term First” rule is applied to deal with Intergovernmental Debt with a maturity of one year or less. Look at it as debt designed to function as the most liquid asset. Next is the “Maturity Date Hierarchy” rule designed for longer-term debt maturity as a First In First Out (FIFO) rule, meaning no one is cherry-picking bonds to best suit the US Treasury’s needs for a given transaction and at the same time longer-term bonds give interest to the Social Security Trust Fund. There is an “Interest Rate Tie Breaker” rule but it hardly matters, but it comes down to two sets of bonds with the same maturity date means the US Treasury must redeem the one with the lowest interest rate first.

While we are in deficit conditions for the Social Security Trust Fund that last rule does kick in but “solvency” is far more at risk because of taxes in to payments out condition over the general health of all that Intergovernmental Debt.

We talked about this in a prior conversation, on when the CBO projects Social Security to become insolvent.

Happens to be sometime in 2032 according to their estimates when reviewing the impacts of the One Big Beautiful Bill (OBBB,) but adding in this conversation you now understand that insolvency determination really means when the Social Security Trust Fund no longer contains assets.

Meaning, there is no Intergovernmental Debt held by the Fund after the above transactions occur. Further meaning, Social Security recipients are looking at an immediate 23% to 28% reduction in benefits on that day forward that the Fund becomes insolvent.

Some numbers, and history.

At the end of 2025 the Social Security Trust Fund was sitting on $2,560,851,711 of Intergovernmental Debt holdings, but that is down from the high at the end of 2020 at $2,883,849,494 (keep in mind that sometime in 2021 is when the Fund went into negative growth mode from then to today.)

Also important, the Social Security Trust Fund publishes “weighted averages” of what is held in the context of Interest Rate and Years to Maturity. This is designed to tell us the health and profitability for the Fund.

Also in 2020, those numbers were 2.519% Interest Rate and 7.036 Years to Maturity. By the end of 2025, those numbers were 2.641% Interest Rate and 4.784 Years to Maturity. For the purposes of context only, at the end of 2019 and arguably the point where the Social Security Trust Fund held the most Intergovernmental Debt the numbers were 2.711% Interest Rate and 7.507 Years to Maturity. For mathematicians and number crunchers, those are going the wrong direction when considering a fund’s “health.”

And know this threat nearly came to be realized before.

In the late 1970s and early 1980s, high inflation and slow wage growth caused the Social Security Program’s expenses to outpace its income. In 1982, Trustees warned that the retirement trust fund was only three months away from being unable to send out full benefit checks. Literally insolvent with less runway to do something substantial.

To prevent a collapse, Congress authorized a temporary “interfund loan” in 1982, allowing the retirement fund to borrow money from the Disability and Hospital Insurance (Medicare) trust funds to keep checks flowing.

Ultimately in 1983 the “Greenspan Commission” proposed several reforms that ended up signed into law by Reagan in 1983. Gradual retirement age increase from 65 to 67, going after higher earners for more (for the first time,) accelerating already scheduled tax increases for Social Security, and also bringing in federal employees and non-profit workers. In short, altering the ratio of payers into the system against benefits needs from the system.

Here we are today…

The Social Security Trust Fund has a new depletion date, Congress has been getting estimates on that timeframe for years now. Technically they are reminded of it with every audit and projection made by everyone, even by law this happens with striking frequency.

We have mentioned this before.

The current political climate suggests Republicans are going to use this to further their intentions to privatize Social Security, roots of this concept go back decades if we are being honest, leaving Democrats in a position of applying something along the 1983 mentality to the conditions we face today.

Roughly 75 million people are on Social Security as of today, or just shy of 22% of the nation’s population. Nearly everyone will eventually use Social Security as the best estimates suggest 87% of Americans are expected to reach the needed age and/or by the estimates become a beneficiary for reasons other than age. That is a significant percentage of Americans in the balance between how Republicans and Democrats feel about this program.

Consider all this, including how Social Security functions day to day, when listening to politicians and their supporting cast of media commentary put forth as their solutions to this issue they have known about all along.

They have plenty of runway to do something meaningful.

The question is, can they be bothered?