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Op-Ed: What happens when the Social Security Trust Fund runs out of money?

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The standard line about Social Security leads voters to believe that even if Congress does nothing, the system will continue to pay scheduled benefits for nearly another decade. That is roughly the life expectancy of someone turning 80 years old today.

For those of us who are 79 years old and younger, the problem with the analysis is that Congress is not in a position to do nothing as Social Security transitions from private banker to creditor.

Over the next 10 years, Congress will have to refinance $2.7 trillion of debt held by the Social Security Trust Fund, much to the chagrin of those who claim that the Social Security Trust Fund doesn’t exist.

The media and so-called experts tend to view this process as a seamless transition that will go unnoticed by the public markets. The reality is that the government will have to borrow more from the public markets at uncertain rates as the Treasury competes with private borrowers for cash. This likely means higher rates for both the U.S. Treasury and for private businesses.

The relationship of Congress and the Social Security Trust Fund dates back to the 1977 Social Security Amendments, which increased taxes and reduced benefit levels. The combined changes allowed the Social Security system to grow into the largest customer of the U.S. Treasury Department, buying nearly $3 trillion of debt from the government from 1983 to today.

That pool of money largely insulated the government from the reality of borrowing in the public markets. As excess cash from Social Security flowed into government securities, the borrowing cost of the government dropped from 10.8 percent to 2.4 percent in 2023.

There is nothing illegal or unreasonable about this relationship. What is unreasonable is for the public to fail to acknowledge that the relationship between Social Security and the government has changed, and how those changes will affect the way the public pays for government services.

From the mid-1980s to 2010, Social Security generated excess cash, which served to make spending easier in Washington. Essentially, Social Security provided a buffer between Congress and its profligate ways.

That stopped in 2010. For the next 11 years, the program depended upon interest to pay the scheduled benefits, meaning Social Security was a player on the sidelines of government finance. The Social Security Trust Fund basically allowed Congress to stand still while the imbalances implied by the system continued to grow.

That buffer entirely evaporated in 2021. For the rest of time, when the Social Security Trust Fund redeems a bond for cash in order to pay the bills, the Treasury Department must find a source of funds. The government has two options: It can increase taxes in order to buy the debt or sell new debt to a new lender.

The federal government is looking at unwinding 30 years of subsidized borrowing over a relatively short period of time. Americans should be paying close attention.

This refinancing burden arrives at the exact time that Social Security is reducing its role as the nation’s private banker. In short, the best customer of the U.S. Treasury is about to become a direct competitor. If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving you so that he can open his own shoe store next door to yours.

It would be wonderful if Congress could do nothing.

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