The Committee for a Responsible Federal Budget is cautioning policymakers against proposals to address Social Security’s looming funding gap by tapping general government revenues, warning that such a move could have far-reaching fiscal and economic consequences for the United States.
Social Security’s retirement program is projected to become insolvent in seven years, which would trigger a one-quarter reduction in benefits for all recipients. According to the CRFB, some lawmakers have floated the idea of using general revenue – either through borrowing or reallocating existing funds – to prevent these cuts.
But an analysis published by the committee on Monday suggests this approach would come at a steep cost that could outweigh the benefits.
Over the next seventy-five years, the CRFB estimates that fully funding Social Security through general revenue could add more than $150 trillion to the national debt when adjusted for inflation, or over $700 trillion in nominal terms.
The analysis also projects that debt as a share of the economy could more than double, potentially “triggering a debt spiral or fiscal crisis.” The committee notes that “borrowing to fund Social Security could…boost debt by over 130% of Gross Domestic Product.”
The report highlights that Social Security has historically operated as a self-financed program, with benefits paid out from payroll tax revenue and the program’s trust fund. Allowing the program to draw from general revenues would mark a significant departure from this structure. The committee writes that such a change “would end Social Security’s status as a contributory and self-funded program and make it more like any other government program.”
Higher national debt levels could also push up interest rates across the economy, affecting everything from Treasury bonds to mortgages. The committee cites Congressional Budget Office estimates that every additional 1% of GDP added to the debt raises interest rates by two basis points.
If Social Security’s shortfall were funded through general revenue, the committee projects that “borrowing to fund Social Security would therefore push up interest rates by an estimated 2.6 percentage points relative to maintaining the integrity of the trust fund.”
It estimates the 10-year Treasury rate would jump from 4% to 6.6%, while 30-year mortgage rates spike to 8.9% from 6.3%. Similarly, student loan interest rates would go from 6.4% to 9% over time.
Beyond the immediate fiscal impact, the committee warns that relying on general revenue could erode one of the last remaining fiscal rules in the US budget process. The Social Security trust fund, which finances more than one-fifth of all federal spending, has historically served as a constraint on unchecked government spending.
The committee cautions that a general fund transfer “would signify the end of the trust fund as a budget rule, and might signal to creditors that the United States is no longer willing to abide by fiscal constraints.”
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