In the Social Security Act of 1935 the income from the payroll tax was to be credited to a Social Security “account.” Benefits were to be paid against this account, but there was no formal trust fund as such. Taxes began to be collected in January 1937, and monthly benefits were to be paid starting in January 1942 (later pushed forward to January 1940). So the payroll taxes were just credits in the Social Security account on the Treasury’s ledger under the initial law.
The investment rules governing payroll tax income were also established in the 1935, and are essentially the same ones in use today. Specifically, the 1935 Act stated: “It shall be the duty of the Secretary of the Treasury to invest such portion of the amounts credited to the Account as is not, in his judgment, required to meet current withdrawals. Such investment may be made only in interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States.” (See Title II, Section 201of the 1935 law)
In the 1939 Amendments, a formal trust fund was established and a requirement was put in place for annual reports on the actuarial status of the fund. Specifically, the law provided: “There is hereby created on the books of the Treasury of the United States a trust fund to be known as the ‘Federal Old-Age and Survivors Insurance Trust Fund’. . . . The Trust Fund shall consist of the securities held by the Secretary of the Treasury for the Old Age Reserve Account on the books of the Treasury on January 1, 1940, which securities and amount the Secretary of the Treasury is authorized and directed to transfer to the Trust Fund, and, in addition, such amounts as may be appropriated to the Trust Fund as herein under provided.” (Title II, Section 201a)
In other words, a formal trust fund was established for the Social Security program and the credits already on the Treasury’s books for the Social Security program were to be transferred to this Fund, along with all future revenues raised for the program.
The investment procedures adopted in 1939 were modified only slightly from those in the original Act of 1935. Basically, changes were made in the interest rate rules governing the investments, and the Managing Trustee was designated as the investing official (who happens to be the Secretary of the Treasury in any case), but in most other respects the language was similar to that in the original law. (See the text of the 1939 Amendments for more details.)
Both the 1935 and the 1939 laws specified three types of purchases that might be made: 1) securities on original issue at par; 2) by purchase of outstanding obligations at the market price; and 3) via the issuance of “special obligation bonds” that could be issued only to the Social Security Trust Fund. These special obligation bonds were not to be marketable, although the other two forms of securities could be. The idea of special obligation bonds was not new nor unique to the Social Security program. Similar bonds were used during World War I and World War II, and it was in fact the Second Liberty Bond Act that was the law amended in 1939 to allow the Social Security program to make use of this type of government bond.
Consequently, over time the Social Security Trust Funds have included a mix of marketable and non-marketable Treasury securities. Over the years, the proportion has shifted heavily in favor of special obligation bonds as the main asset held by the Social Security Trust Funds. Prior to 1960, the Treasury’s policy was to invest primarily in marketable securities, although this policy was not always followed. Since 1960, the policy has been to invest principally in special obligation bonds, unless the Managing Trustee of the funds (i.e., the Secretary of the Treasury) determines that investment in marketable securities would be “in the public interest.” In fact, since 1980 no marketable securities have been added to the Trust Funds. (For a more detailed explanation see the Office of the Actuary’s Actuarial Note #142.)
Since the assets in the Social Security trust funds consists of Treasury securities, this means that the taxes collected under the Social Security payroll tax are in effect being lent to the federal government to be expended for whatever present purposes the government requires. In this indirect sense, one could say that the Social Security trust funds are being spent for non-Social Security purposes. However, all this really means is that the trust funds hold their assets in the form of Treasury securities.
These financing procedures have not changed in any fundamental way since payroll taxes were first collected in 1937. What has changed, however, is the accounting procedures used in federal budgeting when it comes to the Social Security Trust Funds.
