Social Security delay could strain Treasury market, researchers warn

Delaying changes to Social Security could increase pressure on U.S. bond markets and the wider economy as the program’s main retirement trust fund approaches depletion, according to research published June 26 by George Mason University’s Mercatus Center. The Social Security trustees project that the Old-Age and Survivors Insurance trust fund will be exhausted in the fourth quarter of 2032, at which point 78% of scheduled benefits would be payable absent legislative action.

Veronique de Rugy, a senior research fellow at Mercatus, and Jason Fichtner, executive director of the LIMRA Retirement Income Institute, wrote that the early-2030s depletion date could become an inflection point for fiscal stress if Congress does not act before then. Their concern is that a late response could push lawmakers toward additional federal borrowing to maintain benefits, adding supply to Treasury markets at a time of already elevated deficits.

Social Security is financed chiefly through payroll taxes. Its trust funds supplement benefit payments by holding earlier surpluses and interest in special Treasury securities, according to the Social Security Administration. Those securities are backed by the full faith and credit of the U.S. government, and the SSA says the government has repaid the program with interest when those holdings are redeemed.

If Congress combined Social Security’s trust funds, the depletion date could move from the fourth quarter of 2032 to the third quarter of 2034, according to the trustees’ projections cited in the research. At that point, 83% of scheduled benefits would be payable.

Fichtner told CNBC that bond investors could begin reacting before the official depletion date if Congress appeared likely to rely on borrowing. He said markets might look roughly a year ahead and anticipate more than $600 billion in additional annual financing needs.

The Mercatus paper estimates Social Security’s annual gap could rise from $600 billion in 2033 to about $700 billion by 2036. The researchers place those figures against an estimated $2.7 trillion federal deficit and $46.5 trillion national debt in 2033.

The Committee for a Responsible Federal Budget has also warned that trust fund exhaustion could become a turning point for U.S. fiscal policy. Marc Goldwein, the group’s senior vice president, told CNBC that Social Security’s self-financing structure has functioned as one of the country’s remaining fiscal rules. If general revenue were used to close the gap, CRFB estimates the 75-year solvency cost at $800 trillion in nominal borrowing, or $180 trillion after inflation adjustment, according to Goldwein.

How the market channel could work

De Rugy and Fichtner identified two main risks from delayed reform. In one, larger deficits would require more Treasury issuance, pushing yields higher and raising borrowing costs across the economy. Sustained deficits could reduce private investment and make the debt-to-GDP ratio harder to stabilize if interest rates exceed economic growth.

In a second scenario, investors could lose confidence that future federal revenue will be sufficient to meet outstanding obligations. The researchers wrote that price levels could then rise in a way that reduces the real value of government liabilities, producing inflationary pressure.

Fichtner cited recent disruption in Treasury auctions, declining foreign holdings of U.S. debt amid global uncertainty and new U.S. tariff policies, inflation above the Federal Reserve’s 2% target, and longer-maturity Treasury Inflation-Protected Securities rates as possible early signals of strain.

CRFB estimated in 2025 that using general revenue for Social Security could raise a 4% neutral rate on 10-year Treasury bonds to 6.6%. Under that estimate, a 30-year fixed mortgage rate could rise from 6.3% to nearly 9%.

Reform options and growth claims

Goldwein said Social Security changes could affect incentives to save, invest and work because the program is the largest retirement income source for many Americans. CRFB’s 2019 proposal projected that its package of changes would increase the economy’s size by 3.5% to 13% by 2050, add about 0.25 percentage point to annual growth, raise average per-person income by about $8,000 in 2050, and reduce projected debt by about 20% of GDP.

That plan included raising retirement ages while protecting vulnerable workers claiming at 62, automatically enrolling workers in supplemental retirement accounts, and counting all years of work toward benefits, according to CRFB.

This story draws on original reporting from CNBC.