Social Security trust fund depletion may prompt ‘fiscal crisis’: Research
Banners celebrating the 250th anniversary of the independence of the United States hang in front of the U.S. Capitol building in Washington, DC, USA, June 22, 2026.
Kylie Cooper | Reuters
New research shows that delaying Social Security reform could have negative effects on the bond market and the economy.
findings — released June 26 by the Mercatus Center at George Mason University — comes on the heels of the annual Social Security trustees report. agency projects The Old-Age and Survivors Insurance, or OASI, trust fund could be depleted in the fourth quarter of 2032, three months earlier than predicted based on the previous year, he said. It is estimated that only 78% of these benefits can be paid at the moment.
We are bringing the reform closer to its extinction date Co-authors Veronique de Rugy, a senior research fellow at the Mercatus Center, and Jason Fichtner, executive director of the LIMRA Retirement Income Institute, a research initiative within the insurance trade association LIMRA, wrote that this would increase fiscal risk and increase the likelihood that lawmakers will seek additional borrowing, straining Treasury markets and the economy at large.
“We view the impending depletion of the Social Security OASI trust fund in the early 2030s as an inflection point that could lead to a fiscal crisis if prior legislative action is not taken,” De Rugy and Fichtner wrote.
The Committee for a Responsible Federal Budget, a nonpartisan organization dedicated to educating the public on fiscal policy issues, similarly identified Social Security’s upcoming trust fund depletion dates as a potential tipping point for the U.S. economy.
Social Security is funded primarily by payroll tax revenue and can supplement Social Security payments through trust funds that hold prior surpluses plus interest. If Social Security were allowed to spend beyond that money, potentially using general revenue, it would lead to massive new borrowing, according to the CRFB.
“There’s a 90-year-old saying that Social Security is a self-financing contribution program, and in some ways that’s one of our last fiscal rules,” said Marc Goldwein, senior vice president of the CRFB.
“When you say we don’t have to pay for Social Security, you open the door to borrowing more than the country can afford,” Goldwein said. “Once you open the floodgate and the borrowing happens, that’s when we could have a financial crisis.”
How could a trust fund deficit create ‘fiscal distress’?
A sign for the U.S. Social Security Administration is seen outside its headquarters in Woodlawn, Maryland, on Thursday, March 20, 2025.
Tom Williams | Cq-roll Call, Inc. | Getty Images
According to the Social Security Administration, Social Security’s trust funds are invested in government securities backed by the full faith and credit of the U.S. government. Trust fund securities are special issues of the U.S. Treasury and are “as safe as U.S. savings bonds or other financial instruments of the federal government,” the agency said. states on the website.
According to the SSA, the government spends the borrowed money and always repays the program with interest. However, the agency said that in the absence of legislation to address the trust fund deficit, long-term securities would need to be redeemed before maturity.
By consolidating trust funds, lawmakers could extend depletion dates from the fourth quarter of 2032 to the third quarter of 2034. At that time, 83% of the planned benefits will be paid.
“But at this point the bond market looks and says: ‘You’ve got 12 months to get your business back on track; you’re going to be looking for another $600-plus billion a year,'” Fichtner said in an interview with CNBC.
Social Security’s annual deficit could rise from $600 billion in 2033 to nearly $700 billion by 2036, according to research by De Rugy and Fichtner. This comes on top of a projected deficit of $2.7 trillion in 2033 and a national debt of $46.5 trillion.
“Fiscal strain could come sooner than the trust fund runs out,” Fichtner said.
Goldwein noted that the CRFB points to an even bigger tab: $800 trillion in borrowing in nominal terms for a 75-year solvency window, or $180 trillion when adjusted for inflation.
According to De Rugy and Fichtner, recent market events that disrupted Treasury bond auctions could be a “harbinger of things to come.”
Fichtner said foreign holdings of U.S. Treasury securities have decreased due to global uncertainty and new U.S. tariff policies. Other possible early warning signs include rising inflation that has not yet fallen below the Fed’s 2% target and longer maturity rates for Treasury Inflation-Protected Securities; This points to expectations that high inflation may continue.
Affordability crisis on ‘steroids’
According to Fichtner and de Rugy, although the research does not predict an “imminent crisis”, there are already early warning signs.
Markets may be expecting a fiscally responsible solution from Congress that avoids large-scale borrowing. But if that forecast changes to expect borrowing without fiscal support, Fichtner and de Rugy wrote, “the revision in the market will not be gradual, nor will the subsequent adjustment in the price level.”
The study found that the absence of Social Security reform could pose two risks.
First, they wrote, borrowing costs could rise across the economy as rising deficits increase Treasury supply and bond yields rise. While continued deficit spending reduces private sector investment, interest rates may outpace economic growth, making the debt/gross domestic product ratio difficult to stabilize.
Second, investors may lose confidence that future government revenues will be sufficient to cover their outstanding debts. As a result, rising domestic price levels could erode the real value of government liabilities, according to the study. This will trigger inflation, and although bonds will also react, this will not necessarily be a drop in prices as in the first scenario.
Fichtner said consumers who want to borrow money to buy a home or car or use a credit card will pay higher rates as rising interest rates crowd out private spending.
According to Fichtner, interest rates will rise for both the government and consumers, pushing them towards price increases.
“This is similar to the economic crisis we’re seeing today, but on steroids,” Fichtner said.
Fichtner said that 12 months after Social Security’s expiration dates, if Congress does nothing to fix the program’s solvency problems, the bond market could begin shifting holdings and duration risk and moving money around.
If the general fund is used for Social Security, the 4 percent neutral rate on 10-year Treasury bonds could rise to 6.6 percent. 2025 research From CRFB. CRFB estimates that the 30-year fixed-rate mortgage rate could rise from 6.3% to nearly 9%.
Reform could provide economic opportunity
According to Goldwein, deliberate decisions about the future of the program can have a positive impact on the economy.
“If we make smart choices, we can target Social Security benefits to those who need them and spur faster economic growth in the process,” Goldwein said. he said.
Any adjustments to Social Security, most people’s biggest source of retirement income, could change incentives to save, invest and work, Goldwein said. This could help support faster wage growth and faster economic growth, he said.
In 2019, the CRFB reached a decision. plan to fix Social Security will increase the projected size of the economy by 3.5% to 13% by 2050, adding about 0.25 percentage points to the annual growth rate, the agency said. According to the proposal, average income per capita would increase by approximately $8,000 in 2050, and projected debt levels would decrease by approximately 20% of GDP due to the impact of this growth rate.
CRFB’s plan calls for a series of reforms, including raising Social Security retirement ages while protecting vulnerable workers as young as 62, automatically enrolling employees in supplemental retirement accounts and counting all working years toward benefits.
