Each year when the Social Security trustees release their annual report, attention is focused on the projection of the year that the Social Security trust funds will become depleted , that is, the year in which the trust funds' investment holdings in U.S. Treasury securities fall to zero. In their 2018 report, the trustees project that, under their intermediate assumptions and under current law, the Federal Disability Insurance (DI) Trust Fund will become depleted in 2032 and the Federal Old-Age and Survivors Insurance (OASI) Trust Fund will do so in 2034. Although the two funds are legally separate, they are often described in combination. The trustees project that the combined Old-Age, Survivors, Disability Insurance (OASDI) trust funds will become depleted in 2034. Some Americans may believe that if the trust funds were depleted, Social Security would be unable to pay benefits at all. In fact, in 2034, the first year of projected depletion of the combined Social Security trust funds, the program is projected to have enough tax revenues to pay about 79% of scheduled benefits; that percentage would decline to 74% by the end of the 75-year projection period in 2092. Thus, although the trust funds would be insolvent upon depletion, because they would be unable to cover 100% of expenditures with incoming tax revenues, they would not be "completely broke" and unable to pay any benefits. Although benefits would be paid in some form, it is unclear how the necessary reductions would be implemented, because the Social Security Act does not specify what would happen to benefits if a trust fund became insolvent. One option would be to pay full benefits on a delayed schedule; another would be to make timely but reduced payments. This report explains what the Social Security trust funds are and how they work. It describes the historical operations of the trust funds and the Social Security trustees' projections of future operations. It explains what could happen if Congress allowed the trust funds to run out. It also analyzes two scenarios that assume Congress waits until the moment of insolvency to act, showing the magnitude of benefit cuts or tax increases needed and how such changes would affect beneficiaries. Old-Age, Survivors, and Disability Insurance, commonly known as Social Security, is a work-related social insurance program authorized under Title II of the Social Security Act that provides monthly cash benefits to retired or disabled workers and their eligible dependents and to eligible survivors of deceased insured workers. Workers obtain insurance protection by working for a sufficient number of years in jobs covered by Social Security. A worker's job is considered covered if the earnings derived from that job are subject to Social Security taxes and thus are creditable for program purposes. In 2018, an estimated 174 million people (or about 94% of all workers) will work in paid employment or self-employment covered by Social Security. Social Security benefits are based on a worker's career-average earnings in jobs covered by Social Security and designed to replace a portion of the income lost to a family due to the worker's retirement, disability, or death. In May 2018, the Social Security Administration (SSA) authorized benefit payments for 62.5 million beneficiaries, including 43.0 million retired workers, 8.6 million disabled workers, 4.8 million dependents of retired or disabled workers, and 6.0 million survivors of deceased insured workers. The average benefit payment issued that month was $1,412 for retired workers, $1,198 for disabled workers, $596 for dependents of retired or disabled workers, and $1,153 for survivors for deceased insured workers. Social Security's receipts and expenditures are accounted for through two legally distinct federal trust funds: the OASI trust fund and the DI trust fund. In the federal accounting structure, a trust fund is an accounting mechanism used by the Department of the Treasury to track and report receipts dedicated for spending on specific purposes, as well as expenditures made to its beneficiaries that are financed by those receipts, in accordance with the terms of a statute that designates the fund as a trust fund. The OASI trust fund records receipts and expenditures associated with retired workers, their dependents, and survivors of deceased insured workers, while the DI trust fund records receipts and expenditures associated with disabled workers and their dependents. The OASI and DI trust funds operate separately but are closely linked. Several times in the past, Congress has authorized the reallocation of the Social Security payroll tax rate to equalize the financial conditions of the two trust funds. In part because of those experiences, analysts often treat the two funds collectively on a hypothetical basis as the combined OASDI trust funds. The Social Security trust funds, like most federal trust funds, have different attributes than trust funds in the private sector. The Government Accountability Office (GAO) notes the following: In the federal budget the meaning of the term "trust" differs significantly from its private sector usage. In the private sector, a person creates a private trust fund using his or her own assets to benefit a stated individual(s). The creator of the trust names a trustee who has a fiduciary responsibility to manage the designated assets in accordance with the stipulations of the trust. In the federal sector, the Congress creates a federal trust fund in law and designates a funding source to benefit stated groups or individuals. However, in contrast to a private trust fund, the federal government does not have a fiduciary responsibility to the trust beneficiaries, and it can raise or lower future trust fund collections and payments or change the purposes for which the collections are used by changing existing laws. Moreover, the federal government has custody and control of the funds as well as the earnings of most federal trust funds. The trust funds' primary source of revenue is the Social Security payroll tax, but they also receive income from federal income taxes on benefits and from interest on the funds' investment holdings. The payroll tax consists of a 12.40% total tax on wages and self-employment income up to the taxable maximum, which in 2018 is $128,400 and generally increases annually with average earnings growth in the economy. Of the 12.40% total, 10.03% is credited to the OASI trust fund and 2.37% to the DI trust fund. Some Social Security benefits paid to people with incomes above a certain threshold are subject to federal income tax. Most of the resulting revenue is credited to the Social Security trust funds, and some goes to Medicare's Hospital Insurance (HI) trust fund. In 2017, the combined trust funds' total receipts were $996.6 billion, with 87.7% from payroll taxes, 8.5% from interest income, and 3.8% from income taxes on benefits (see Appendix A ). In 2017, the combined trust funds' total expenditures were $952.5 billion, with 98.8% for benefit payments and 0.7% for administrative expenses (see Appendix A ). The remaining 0.5% was transferred to the Railroad Retirement Board (RRB) as part of a financial interchange with the RRB. This annual exchange of funds places the Social Security trust funds in the same financial position in which they would have been if railroad service had been covered by Social Security. In years when Social Security's total receipts, including interest, exceed expenditures, then the trust funds have an annual surplus . By law, that surplus is invested in special-issue U.S. Treasury securities (i.e., nonmarketable government bonds), which are backed by the full faith and credit of the federal government. In other words, Social Security's cash surpluses are borrowed by the General Fund of the U.S. Treasury. The Treasury, in turn, incurs an obligation to repay the bonds with interest. These bonds are assets to the Social Security program but liabilities to the rest of the government. In 2017, the combined trust funds generated an annual surplus of $44.1 billion ($996.6 billion in total receipts minus $952.5 billion in total expenditures; see Appendix A ). When the trust funds spend more than they receive in taxes and interest, they have an annual deficit, which requires Social Security to redeem bonds accumulated in previous years. The Department of the Treasury pays benefits with cash from general revenues and writes down an equivalent amount of the trust fund's bond holdings. In their latest report, the Social Security trustees project that total expenditures for the combined trust funds will exceed total receipts in 2018, resulting in an annual deficit for the first time since 1982. An alternative measure of the trust funds' finances is given by the cash-flow balance . That measure does not consider interest income, so the trust funds run a cash-flow surplus when tax revenues exceed expenditures, and they run a cash-flow deficit when they spend more than they receive in taxes. Total receipts for the combined trust funds in 2017 were $996.6 billion, with $911.5 billion in non-interest income (i.e., payroll taxes and income taxes on benefits) and $85.1 billion in interest income (see Appendix A ). Because total expenditures for the combined trust funds in 2017 were $952.5 billion, there was a combined cash-flow deficit in 2017 of $41.0 billion ($952.5 billion in total expenditures minus $911.5 billion in non-interest income). The balance of a trust fund is the accumulation of excess receipts over expenditures (i.e., the sum of annual surpluses less annual deficits). A positive balance denotes the total amount of the trust fund's investment holdings in U.S. government bonds (also known as asset reserves ). Annual surpluses add to a trust fund's balance while annual deficits reduce it. The annual surplus of $44.1 billion in 2017 increased the trust funds' combined balance from $2.85 billion at the end of 2016 to $2.89 billion at the end of 2017 (see Appendix A ). If the trust funds are not able to pay all of current expenditures out of current tax revenues and accumulated trust fund assets, they are insolvent .