Debt Digest | It’s Too Late for Social Security Private Accounts
Links & Fiscal Facts
Welcome back from the holiday break! Here’s the first Debt Digest of 2025:
It’s too late for Social Security private accounts. The Manhattan Institute’s Brian Riedl highlights the transition costs of diverting half of workers’ payroll taxes— $37 trillion—into individual accounts over the next 30 years. “30-year SocSec revenues fall to $37 trillion, and more interest raises the total cost to around $140 trillion - a shortfall of $103 trillion! This is in addition to a Medicare shortfall of $87 trillion over the same three decades,” explains Riedl (see figure below). While this transition could make Social Security sustainable in the very long run, Riedl warns it would create $190 trillion in combined Social Security and Medicare deficits over the next 30 years, sparking a “brutal debt crisis.” He explains: “So we never even make it to the Social Security promised land.”As I’ve covered before, “The unfortunate truth is that US legislators procrastinated for too long [for such a transition] [...] What remains is to stop the bleeding.” Congress should focus on reducing future benefits, especially for higher earners, and transitioning Social Security to a basic anti-poverty benefit scheme that frees up individual income for private saving.
DOGE should tackle Medicare and Social Security. Veronique de Rugy, a senior fellow at the Mercatus Center, argues that the Department of Government Efficiency (DOGE) should aim to cut entitlement programs like Social Security and Medicare despite the political obstacles involved. “Mindlessly ignoring their unsustainability just because they are popular is shortsighted and actively irresponsible. It perpetuates a political culture in which difficult choices are avoided, fiscal irresponsibility accelerates, and long-term economic stability is sacrificed for short-term political expediency,” writes de Rugy. She also highlights an important aspect that may help DOGE drive entitlement reform: “The DOGE guys have the biggest microphone any fiscal reformer has ever had.” As we’ve written, DOGE’s chances of success on entitlement reform would significantly improve if Congress grants it BRAC-like powers, making its recommendations self-executing unless Congress rejects its plan.
Lessons from Chicago’s fiscal challenges. The American Enterprise Institute’s Andrew Biggs warns of the risks of unfunded entitlement obligations, drawing parallels to Chicago’s fiscal problems. He illustrates how Chicago, now trying to set aside funds for its pension obligations, does so at the expense of other critical city functions like policing. Going beyond the city level, Biggs explains that closing the long-term federal fiscal gap would require increasing Social Security, Medicare, and debt service payments by 39 percent today. “If those additional funds came from other federal programs, then the entitlement-plus-debt share of spending would rise to 68%. That’s no way to run a government that exists for many other reasons than paying creditors and retirees,” he writes. The unsustainable federal debt trajectory already strains other federal priorities. As I emphasized in my recent House Budget Committee testimony: “In 2024, net interest payments exceeded federal spending on discretionary defense appropriations—an alarming milestone that underscores the trade-offs imposed by fiscal irresponsibility.”
Likely spending and regulation reforms DOGE could drive forward. On the Cato Daily Podcast with Caleb Brown, Cato’s Alex Nowrasteh and Ryan Bourne discussed the Cato Institute Report to the Department of Government Efficiency (DOGE), identifying the proposed reforms they think are most likely to be implemented. Nowrasteh pointed to reforms including ending federal DEI initiatives, reducing energy regulations that hinder domestic production, limiting federal subsidies to universities, and tightening welfare eligibility for non-citizens. He says these changes could save $150 billion annually. Bourne emphasized the high likelihood of reversing recent expansions in energy and green technology subsidies introduced under President Biden. Nowrasteh also noted that the upcoming debate over extending the Tax Cuts and Jobs Act (TCJA) could drive these reforms, as the Republican Congress seeks spending cuts to offset the cost of extending the TCJA provisions.
An external fiscal commission and constitutional restraints could rein in federal debt. Reason’s Eric Boehm overviewed last month’s House Budget Committee hearing, where witnesses, including me, discussed potential mechanisms to limit reckless government spending and stabilize the federal debt. “New constitutional amendments or other mechanisms like debt commissions—a solution favored by Cato Institute budget expert Romina Boccia, who also testified at this week's hearing—are fine ideas worth pursuing. Embedded in both those ideas, however, is the admission that our elected leaders are somehow unable to do their most fundamental jobs without artificial constraints. And that may very well be true: Available evidence certainly points to that conclusion,” writes Boehm. You can read my abbreviated remarks from the hearing here and see my responses to Committee members’ questions here.
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