Question

What happens to social security funds once they are paid into the system?

Answer 1

The Social Security taxes paid by workers and employers are credited to trust funds for the Social Security. The trust funds are defined by law as a means of setting aside money earmarked for Social Security. The Trust funds are overseen by a Board of Trustees. It is composed of the Treasury Secretary, who is the managing trustee, the Labor and Health and Human Services Secretaries, the Social Security Commissioner, and two public trustees from various political parties who are appointed by the President and confirmed by the Senate.

By law, the funds are invested in interest-earning, special-issue Treasury securities. The funds are in effect loaned to the Treasury, which borrows the money just as it borrows money when it sells Treasury securities to the public. The trust funds receive Treasury securities bearing a market interest rate in return for the funds that they lend to the government. The average portfolio interest rate held by the Social Security Trust Fund in 2016 was 3.2 per cent.

Because the federal government spends the cash it borrows from Social Security, "some people see the current increase in trust fund assets as an accumulation of securities that the government will not be able to make good on in the future," Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the US government. Social Protection was also paid back by the government, with interest. Therefore, the special issue securities are as secure as U.S. savings bonds or other Federal Government financial instruments.