How Social Security is funded
Social Security is primarily financed through payroll taxes paid by workers and employers. When revenues exceed benefit payments, surpluses are invested in special-issue U.S. Treasury securities held in trust funds. The program has run deficits since 2021, drawing down those reserves — a trend the trustees project will continue until the funds are exhausted in the early 2030s.
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If Congress were to fund Social Security through general revenue — effectively opening the program to large-scale deficit borrowing — the ripple effects on everyday borrowing costs could be severe. A 4% neutral rate on 10-year Treasury bonds could rise to 6.6%, according to 2025 research from the CRFB. A 30-year fixed-rate mortgage could jump from 6.3% to nearly 9% under that scenario.
«It’s like the affordability crisis we’re seeing today, but on steroids,» Fichtner said. Rising interest rates would crowd out private spending, making it more expensive for consumers to borrow for a home, a car, or everyday credit card use — while simultaneously pushing up prices across the economy.
The research identifies two distinct risk channels. The first is a supply-side pressure: rising deficits would increase Treasury issuance, push bond yields higher, reduce private sector investment, and potentially send the debt-to-GDP ratio into an unstabilizable spiral. The second is a confidence channel: if investors conclude that future government revenue will be insufficient to cover outstanding debt, rising domestic price levels could erode the real value of government liabilities — triggering inflation even without a sharp drop in bond prices.
Goldwein underscored the institutional stakes of crossing that line. «There’s been this 90-year promise that Social Security is a self-financed contributory program, and in some ways that’s one of our last fiscal rules,» he said. «Once you say we don’t have to pay for Social Security, you’ve opened the floodgate to borrowing far more than the country can afford. Once you open that floodgate and that borrowing happens, that’s when we can get a fiscal crisis.»
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Reform is not only a damage-limitation exercise, according to Goldwein. «If we make smart choices, we can target Social Security benefits to those who need it and actually promote faster economic growth in the process,» he said. Any adjustments to the program — which represents most Americans’ largest single source of retirement income — would reshape incentives to save, invest, and work, with downstream effects on wages and output.
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