What happens to the Social Security surplus?
According to the National Academy of Social Insurance, by law, Social Security’s surplus funds are invested in inter-est-bearing Treasury securities, which earned an effective interest rate of 3.6 percent in 2014. The interest earned is credited to Social Security’s trust funds. The securities can be redeemed whenever needed to pay Social Security benefits. In financial markets, Treasury securities (bills, notes and bonds) are considered an extremely safe in-vestment because they are backed by the full faith and credit of the United States. Private pension funds maintain large investments in U.S. bonds, as do many institutional investors and foreign governments.
The sum of all Treasury securities makes up the national debt. Most of the debt is held by (that is owed to) the public: individuals, cor-porations, and other investors in the United States and abroad who have loaned money to the government by in-vesting in government securities. As of March 2015, 15 percent of the national debt was owed to Social Security trust funds; another 13 percent was owed to other federal trust funds or accounts. Some people express concern when they hear that Social Security’s annual cash surpluses are loaned to the U.S. Treasury. This is not a misuse of Social Security funds; rather, it is the procedure that has been required by law since the inception of the program. This procedure has the advantage of investing Social Security reserves in one of the safest financial instruments available.
Regardless of how the government uses the cash, the Treasury securities held by the trust funds are a binding legal commitment requiring the Treasury to redeem the securities with interest when the money is needed to pay Social Security benefits. The promise to pay that is embodied in U.S. Treasury securities has never been broken. From a unified federal budget perspective, the interest owned to Social Security is an outflow from the non -Social Security budget to the Social Security trust fund. From a Social Security financing perspective, the interest earned on the reserves is an integral part of the program’s income. It is a legal obligation of the federal government to the Social Security system and it’s beneficiaries.
Hopefully this helps you as you make the very important decision on when to take your Social Security benefits. Feel free to call us to sit down and talk about your specific retirement income needs.