When we started working, we probably didn’t think much about retirement or Social Security beyond the regular Social Security deductions from our paychecks. The exception might have been when our parents talked about it as a “safety net,” monthly payments that, together with pensions and savings, would support our retirement.

Then, and now, the safety net was taken for granted even though nobody talked about where that money would come from. If we did wonder, we understood that the money came from our paychecks and from employer contributions. If we were self-employed, we knew that we also had to contribute the employer’s share.

Where Did the Money Go?

According to the Social Security Department [add link https://www.ssa.gov/oact/progdata/fundFAQ.html to Social Security Department, the money is deposited into two separate trust funds.One of them pays retirement benefits, and the other makes payments to people who meet the government’s disability criteria. The amount a recipient gets depends on how much that individual has contributed, or has been contributed on their behalf, during the working life. The Social Security Administration manages and makes payments from both funds.

A “trust fund” is just what the name implies, a fund that was established and is administered by someone else to benefit a specified beneficiary. The main difference between Social Security and a private trust fund is that the Federal Government owns the assets of Social Security Trust funds and can unilaterally raise or lower the amounts it collects and what it pays to beneficiaries, something trustees of most private trusts are not able to do.

A Board of Trustees oversees the financial operations of the trust funds and reports annually on its financial status to the Congress.

What Are the Concerns About Social Security Trust Funds?

When the Social Security trust funds were established in 1935, the system worked on a pay-as-you-go basis. In other words, money collected from workers during a given year was used to pay beneficiaries that year. The system worked well for years, aided by the fact that a generation of Baby Boomers, about 78 million of them, was working and paying into the trust funds.

However, beginning about 2010, the Baby Boomers began to retire and began drawing benefits instead of contributing to the trust funds. Even though, according to Pew Research, entrance of the Millenials, an even larger group, into the workforce should have helped, their entrance into the workforce coincided with a recession. That recession increased unemployment and produced stagnant wages. As a result, less money was available to the trust funds to pay a growing number of retirees.

The discrepancy between income and promised payments fueled concerns about an inevitable insolvency of the trust funds, despite steps already taken to shore up the funds, including raising the retirement age for entitlement to full benefits. “Will Social Security run out of cash and be insolvent” are certainly prominent in the minds of individuals looking at the financial status of the Social Security program. And financing the programs will take a hit, according to the 2023 Social Security Trustees report. By 2033, scheduled benefits would be cut 23%. In other words, payouts would be 77% of scheduled benefits. Unless the situation stabilizes, other steps — such as raising the cap on wages that Social Security contributions are based upon — may be needed to improve the financial strength of the program.