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What does “The Fed” have to do with Social Security?
The Federal Reserve (Fed) is in charge of the nation’s monetary policy. Most folks pay scant attention, though the media reports when the Fed raises interest rates (tightening the money supply) to dampen inflation and slow economic growth a bit. It also reports when the Fed lowers rates to create a stimulus to a floundering economy. In this piece Sean Williams mentions how Social Security’s financial health is influenced by three factors: immigration (generally a net positive), fertility rates, and The Fed.
Regarding the latter factor, the Social Security Administration is required by law to invest excess revenue in special-issue bonds, meaning Social Security is loaning out its excess cash to the federal government in exchange for Treasury bonds that pay a set interest rate over a defined period of time. Since the Fed is now in a tightening cycle, the yields on these government bonds should rise, resulting in more interest income.
The Social Security Administration reports $2.89 trillion in excess cash currently in its investment holdings that is earning nearly 2.9% per year. It is important to keep in mind, however, that the payroll tax brings in the most income to the program; still, interest income was about 8.5% of all revenue collected in 2017. Full article here.