Released October 27, 2009
RALEIGH, N.C. -- There seems to be much discussion about what happens to contributions made to Social Security by taxpayers. Many people believe this money is immediately loaned to the federal government and replaced with IOUs. Is this true, and is it something to worry about?
Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:
"It is true. When the framers of Social Security developed the system back in the 1930s, what they, I think, rightly concluded is that if the system had any spare money - reserves, if you will, for the future - that money ought to be invested, not just lie around, because if you invest it, you earn some interest.
Then the question became, well, what do we invest it in? And the framers wanted Social Security investments to be absolutely safe. So if you look around the investment world, actually - and many people will find this hard to believe - actually, the safest investments around are with the federal government, so-called treasury securities. So that's what Social Security is required to do by law.
If they have excess funds, they have to invest them in treasury securities. That money does go to the federal government. The federal government can spend that money. That means the cash in the reserve fund of Social Security is replaced by these treasury security IOUs.
The good news is the federal government has a perfect track record, perfect, going back more than 200 years of always paying its debts, paying interest on those treasury securities as well as paying the principal when it's due. So I don't think that's an issue. Now we did have a debate a couple of years ago in the country about whether we should change the investment mix of Social Security. The conclusion then was still, we ought to keep it the way it is, and, indeed, I think that will remain as is for the foreseeable future."
--30--
http://www.ncsu.edu/project/calscommblogs/news/archives/2009/10/economic_perspe_477.html
