This week on Facing the Future, host Bob Bixby spoke with Veronique de Rugy and Jason Fichtner, co-authors of a new research paper from the Mercatus Center at George Mason University titled, “Social Security’s Fiscal Gap and the Risk of Bond Market Strain.” Their conversation highlighted the urgency of addressing Social Security’s financing gap, the potential borrowing needs that lie ahead, and the ripple effects those needs could have on inflation, interest rates, and economic growth.
Fichtner, a former deputy commissioner of the Social Security Administration, noted that for over 30 years, the program’s trustees have warned Congress about the impending depletion of the Social Security trust funds, with the timeline consistently hovering between 2029 and 2042. “For 30 years, we’ve been warning the American public and Congress this is coming, but they’ve just put it off, put it off, put it off,” he said. The main trust fund, Old-Age and Survivors (OASI), is now projected to be exhausted by 2032, forcing a critical decision point: either Congress must authorize Social Security to borrow from the Treasury or enact substantial tax increases or benefit cuts.
de Rugy expressed frustration with the lack of attention Social Security’s impending insolvency has had on the campaign trail. “We have an enormous problem that politicians don’t seem to be willing to even have a conversation about,” she said. “ It is striking that the senators elected in November will face the depletion of the trust fund. You would think that as a result, it’d be extremely important to ask them what their solution for this is going to be. And yet I haven’t heard anyone ask this question to politicians.”
Fichtner explained that the cost of delay has dramatically increased. Whereas a modest increase in payroll taxes of less than 2 percentage points could have secured 75 years of solvency 15 years ago, waiting until 2032 would require an increase of 5 percentage points or more. This could push the combined payroll tax rate for Social Security and Medicare above 20 percent from its current 15.3 percent.
With Congress historically disinclined to raise taxes or cut benefits, de Rugy and Fichtner expressed concern that borrowing to fund all scheduled benefits after trust fund depletion would be the easy political route. However, they warned that this path is fraught with economic risks. The U.S. is already carrying nearly $40 trillion in debt and running annual deficits of nearly $2 trillion, resulting in a debt-to-GDP ratio exceeding 100 percent.
“You start looking at what this means going into trust fund depletion,” Fichtner said, “and if we don’t do anything but Congress allows Social Security to borrow to make up the difference, we’re talking between $600 and $700 billion more annually. That’s huge. So you start thinking, what does that mean? It means the Treasury has to go out on the public market and say, hey, people, give us money. We need to borrow. So there’s now a higher competition for loanable funds, which means that increases yields…. And so you get to the point where people might say, you know what, you’re going to borrow an additional $600, $700 billion for the next several years to close the Social Security gap? You’re not really serious about closing your fiscal problems. We’re not even talking about adding Medicare or other things.
The market reaction, Fichtner said, might be, “We’re going to demand a higher interest rate. So instead of the 4.6% that I’d be asking for a 10-year now, we start asking for 5.2, 5.5. Maybe it goes up to six…. That then trickles through the rest of the economy. Mortgage rates go up, car loans go up, the interest you pay to start a business goes up. So all of a sudden you’re looking at mortgages that instead of being six and a half or nine and a half percent, your credit, your car loans go up to 10%. All this creates then the harder ability to start small businesses and borrow money that slows the economic growth. It also creates more inflation, which means it’s more expensive to buy things and it retards the economic activity across the board. We’re not looking at a fiscal crisis that leads to bankruptcy. We’re looking at a fiscal crisis that leads to a long-term deterioration in economic growth, wage stagnation, and inflation.”
de Rugy highlighted the inflationary pressures linked to unchecked borrowing. She recalled the inflation spike of 2021-2022 as a warning sign: “The commitment to do enormous amounts of borrowing without any fiscal backing visible to investors could bring on inflation before we even have to borrow this money.” This inflation would further reduce purchasing power and complicate the Federal Reserve’s efforts to maintain stability.
The authors warned against “fiscal dominance,” where the central bank is forced to prioritize financing the government’s debt over controlling inflation. This creates a vicious cycle of rising debt, higher interest payments, and inflationary pressures. The bond market, reacting to this fiscal stress, demands higher interest rates, which then reverberate throughout the economy.
“I am always baffled,” de Rugy said, “to see that people aren’t more nervous about inflation rising. We saw this in 2021, 2020. In 2021. People were saying, ‘don’t worry if inflation rises, the Fed has the tools. But the tools are extremely brutal, as we’ve lived through, and they’re actually really not that effective. Sure, inflation’s down but we can’t say that inflation has been defeated entirely. And to the extent that it’s gone down, it’s gone down with interest payment on the debt going up quite dramatically. Even the medicine is going to be extremely painful. So I just don’t understand that there’s not actually more people being wary of even the medicine and what it’s going to take to actually address and avoid the consequences of this path that, again, we have been on and we have known we’ve been on for decades.”
The conversation concluded with a strong call to action. Both de Rugy and Fichtner emphasized that reforming Social Security is not only a retirement policy imperative but also crucial for fiscal and market stability. “The sooner people wake up to this and start doing something about it, the more likely we are to solve it, to avoid some sort of crisis,” Fichtner said. They warned that wishful thinking is a poor strategy and that the time for addressing Social Security’s financial challenges is rapidly running out.
