Here's How Social Security Spends $1 Trillion a Year - The Motley Fool

Whether you realize it or not, Social Security is our nation's most important social program. Each month, the Social Security Administration (SSA) dishes out more than 64 million benefit checks, with at least 22 million folks being pulled out of poverty as a result of their guaranteed monthly payout. In total, 62% of retired workers -- retirees make up about 70% of all Social Security beneficiaries -- lean on the program to account for at least half of their monthly income.

Something else you may not realize is just how massive Social Security truly is. In a typical year, spending for the federal government will come in around $4 trillion. In 2018, Social Security alone spent $1 trillion!

Where does all of this money go? Let's take a closer look.

Image source: Getty Images.

Social Security benefits account for close to 99% of all spending

While this really shouldn't come as a surprise, nearly 99% of the $1 trillion spent by the program in 2018, according to the latest Social Security Board of Trustees report, went to fulfilling payouts to eligible beneficiaries. It's probably good to know that virtually all of the money being collected is ending up right where you'd expect it to.

When combining the payouts of the Old-Age and Survivors Insurance Trust (OASI) and Disability Insurance Trust (DI), we see that $988.6 billion was divvied out to beneficiaries in 2018, with $844.9 billion going to the OASI and $143.7 billion headed to the DI.

Let's break things down a bit more, though (note, figures are rounded for simplicity). 

Of the $844.9 billion in payouts to the OASI, most of it went to retired workers. Retirees received $686.1 billion of the $1 trillion outlaid in 2018, with the eligible spouses and children of retired workers netting another $37.4 billion. This means retired workers and what the Trustees report refers to as their "auxiliaries" (i.e., eligible family members, such as spouses or children) received 72% of all of the money the Social Security program paid out in 2018.

The remaining $121.2 billion for the OASI went to the survivors of deceased (but eligible) workers. Most of these payouts were made to aged widows and widowers ($96.6 billion) and the children of deceased workers ($20.7 billion), with the remainder going to disabled widows and widowers, widowed mothers and fathers caring for child beneficiaries, and the parents of deceased workers.

The OASI category also includes the lump-sum death expense -- a one-time $255 payout paid to a surviving spouse following the death of an eligible worker. In 2018, this expense came to $207 million.

Meanwhile, the DI program was responsible for $143.7 billion in payouts in 2018, with $135 billion of that winding up in the hands of long-term disabled workers. The remaining payouts were to the qualifying spouses and children of disabled workers, who netted $536 million and $8.2 billion, respectively.

Image source: Getty Images.

Here's where the other 1% goes

Of course, you'll note that $988.6 billion means that more than $11 billion in spending last year is unaccounted for, to this point. Let's take a look at the other two expenses the Social Security program faces that don't directly have anything to do with beneficiaries.

First, there are the administrative costs to run the program. We're talking about the employees of the SSA, the rent for SSA offices, the fee to pay the power bill...everything and anything associated with facilitating payments and handling questions and concerns from the public and beneficiaries. In 2018, net administrative expenses totaled just shy of $6.7 billion, with the SSA accounting for $6 billion and the Department of the Treasury making up most of the remainder.

The key point here is that while it costs money to operate the Social Security program, it remains one of the most efficient programs in government. Putting aside the jokes about wait times at your local Social Security office, program expenditures amount to less than 0.7% of all income collected on an annual basis. This means more money winds up where it belongs: in the hands of beneficiaries.

The remaining $4.9 billion is a transfer made from the Social Security program to the Railroad Retirement Board each year. Railroad Retirement benefits were set up by the federal government at the same time as Social Security, in the mid-1930s, to mimic the benefits paid out by Social Security. Every year, Social Security transfers a small portion of its received income ($4.9 billion in 2018) to this board, which handles retirement payouts to railroad workers.

Image source: Getty Images.

What the future holds for payouts

Now that you have a better understanding of how Social Security spends $1 trillion in a single year, what might we expect to see regarding payout trends as time marches on?

For one, you can almost certainly expect the growth in annual expenditures to outpace revenue collection. The most recent Trustees report has forecast that 2020 will be the first year since 1982 where the program expends more than it collects. With each passing year, this net-cash outflow is expected to widen, implying that program outlays are going to grow at an extraordinary pace. If you're wondering why, look no further than the steady stream of baby boomers entering retirement and claiming their Social Security retirement benefit.

As outlays widen, the impact of ancillary costs, such as administrative expenses and Railroad Retirement transfers, will further lessen. This could be especially true of administrative expenses, with the SSA encouraging workers to create "my Social Security" accounts. These accounts allow workers to do a number of things from their homes that they could previously only do inside a Social Security Administration office. Not to mention, making decisions with the click of a mouse is cheaper for the SSA over the long haul.

Additionally, as alluded to above, expect to see the percentage of benefits paid out to retired workers climb. With disability cases flat or declining, and boomers stepping away from the workforce, a greater percentage of future payouts are liable to wind up in the hands of retired workers and their auxiliaries.

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