Social Security’s trust fund is nearing insolvency, and the borrowing binge that may follow will rip through debt markets, economist warns

The latest estimates from the Congressional Budget Office show that the Social Security trust will run out of money by fiscal year 2032, which starts on October 2031.

That means anyone who wins a Senate seat in this year’s midterm elections will be in office when it’s time to fix the entitlement program’s finances. But it will be tempting for lawmakers to avoid making tough political choices like cutting payments or hiking taxes.

Instead, they could decide to finance Social Security’s shortfall with more debt, though that risks swift economic consequences, according to economist Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center.

In a Creators Syndicate op-ed, she warned financial markets would immediately account for the additional borrowing.

“What most people are missing is that, this time, the consequences may show up quickly,” de Rugy wrote. “Inflation may not wait for debt to pile up. It can arrive the moment Congress commits to that debt-ridden path.”

For decades, surplus payroll tax revenue was socked away in the trust fund, which was designed to be tapped when revenue was no longer sufficient to cover benefits. That milestone came in 2010, and the trust fund has been rapidly shrinking since then.

If Congress fails to take any action before insolvency hits, Social Security benefits would be paid only with revenue that comes in. The Committee for a Responsible Federal Budget has estimated that a typical couple aged 60 today retiring at insolvency would face an $18,400 cut.

The CBO’s baseline forecast assumes payments will stay on their current trajectory after the trust fund runs out. Meanwhile, it also has penciled in relative calm in interest rates and inflation over the next decade.

But de Rugy said that outlook is misleading, given that the value of government debt is based on investor confidence in primary surpluses being enough to meet obligations.

“When the belief weakens, markets don’t just sit around and wait for the reckoning,” she explained. “They adjust immediately. And in the United States, that adjustment usually shows up as inflation.”

She pointed to the $5 trillion in pandemic-era stimulus that was financed with debt and wasn’t followed up with any austerity. Inflation followed and hit a high of 9%, weakening the dollar and repricing government debt to match expected future primary surpluses.

The fallout from a borrowing binge to shore up Social Security could be even worse, as investors are unlikely to give Congress a grace period to figure out a more sustainable solution, de Rugy said.