A lady from Waiehu expressed a common misconception regarding why the Social Security Trust Fund is invested the way it is.

The Card

The Card

The Charge: As far as her letter goes, she’s right: FICA receipts in excess of Social Security expenses is loaned to the Treasury in the form of an interest-bearing bond. As far as she’s concerned, the money has been frittered away, and taxpayers left to cover the obligation. What she doesn’t understand is that this isn’t a bug, it’s a feature.

Investing 101: When we invest money, whether with a friend, IBM, or a Treasury note, most is soon “blown” to cover operating expenses or purchase capital equipment, with the intent that the borrower will add value to their enterprise. Some of that added value is repaid to the investor.

The same holds true for monies invested with the Federal Government. Some cover current expenses, while some fund new endeavors. If the funds are deployed successfully, it encourages economic growth, adding to tax receipts. Some is paid back to the investor, the Social Security Administration.

What Part Of Social Security Don’t You Understand?: Unlike private investments, the US Treasury has never welched on a Treasury note, by definition the safest investment. On the average, investments can’t sustain a growth rate greater than the growth rate of the national GDP. Some tank, others enjoy a short term advantage, while Treasuries track closely to the GDP. For a program as large and crucial as Social Security, with a fund as large as the Trust fund, it’s prudent to invest in the Federal Government which creates the environment for business to grow, and therefore future taxes to be paid.