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Economic Perspectives, 14, 4th, No. 6, November 1990
The need for Social Security reserves and their effect on the budget

Social Security is a selffinancing system that collects payroll taxes from employees, employers, and the selfemployed and uses them to provide benefit payments to covered retired and disabled persons and their dependents.

 

In recent years, the Social Security trust funds have accumulated reserves in order to pay future benefits to current workers. This has become a matter of controversy that primarily involves two questions. First, is there a need for Social Security to accumulate reserves to pay future benefits? Second, because reserves are invested by the Social Security trust funds in special Treasury securities, they thereby reduce the amount that the federal government must borrow from the public when the federal budget is in deficit. Does the availability of growing reserves in the Social Security trust funds adversely affect decisions on federal taxation and expenditure policies relative to other government operations?



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