Social Security’s Role in the Federal Debt Explosion: Remarks at the Pension Research Council Conference

Continuing the conversation tomorrow at noon ET — join us in DC or online.

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On April 30, we participated in a conference organized by the Pension Research Council at The Wharton School on public debt and retirement security, where we presented key findings from our working paper on Social Security’s contribution to the federal debt. Below is a lightly edited and partial version of our remarks.

Please join us tomorrow, May 6, 12-1 pm EDT, at the Cato Institute or online to dive deeper into the conversation with Jessica Riedl (Brookings Institution), Eugene Steuerle (Urban Institute), and Romina Boccia. Also see “Yes, Social Security can run budget deficits” by Jessica Riedl.

Good morning. We’re excited to join the Pension Research Council conference.

Let me start with what’s often misunderstood. Social Security is typically framed as a future problem—something tied to trust fund exhaustion several years from now. But from a unified budget perspective, it’s already a major driver of federal debt today.

Since 2010, Social Security has been running cash-flow deficits, meaning it pays out more in benefits than it collects in taxes. To make up the difference, the Treasury borrows from the public. Between 2010 and the projected trust fund exhaustion around 2032, borrowing will total about $4 trillion (Figure 1).

Looking longer term, the imbalance is even more striking: Social Security’s 75-year unfunded obligation is about $28 trillion (Figure 2). So, this isn’t just a future cliff—it’s an ongoing and growing fiscal challenge.

Not Just Demographics—Program Design Drives the Problem

This issue is often presented as a demographic story. You’ll hear that Americans are living longer, having fewer children, and that rising costs are therefore inevitable. But that’s only part of the story—and it’s not the most important part.

What our paper shows is that program design choices are central to why costs are rising and why the system is unsustainable. Yes, demographics matter. The worker-to-beneficiary ratio has fallen significantly over time. But three policy choices are doing much of the work:

• First, Social Security pays higher benefits to higher earners because it is designed to replace earnings, not just prevent poverty. That means a large share of benefits flows to middle- and upper-income retirees.

• Second, initial benefits are wage-indexed, so as wages grow, each new cohort of retirees receives higher inflation-adjusted benefits than the one before.

• Third, we’ve effectively expanded the number of years people receive benefits, as life expectancy has increased, without making equivalent adjustments to eligibility ages.

Put together, this means benefits grow faster, last longer, and extend well beyond basic poverty protection.

So, the key takeaway is that rising Social Security spending isn’t just an inevitable consequence of aging—it is largely the result of policy choices. And that means it can be changed.

This is exactly where our book, Reimagining Social Security: Global Lessons for Retirement Policy Changes, comes in. The United States is not the first country to face population aging. Most OECD countries encountered these pressures earlier—and many enacted reforms in response. They slowed benefit growth, better aligned benefits with need, adjusted retirement ages to reflect longer lifespans, and introduced automatic stabilizers to prevent political delay.

These countries recognized that while aging is real, policy determines whether aging translates into unsustainable costs. That lesson applies directly to the United States today.

Who Is Most at Risk from Inaction

It’s important to understand what happens if we don’t act.

Under current law, once the Social Security trust fund is exhausted—around 2032—benefits would be cut automatically by about 25%. These cuts could apply across the board, but their impact would not be equal. Social Security represents a relatively small share of wealth for higher-income households, but a much larger share for lower-wealth households (Figure 3).

Lower-wealth retirees would be hit the hardest by automatic benefit cuts (Figure 4). That’s why delay is not neutral—it increases the risk of abrupt, poorly targeted reductions that harm the most vulnerable.

We Cannot Outgrow or Inflate Away Social Security’s Financing Problem

Policymakers sometimes point to stronger economic growth to address Social Security’s financing challenges without making structural reforms. To test this, we used the Cato Institute’s Social Security model* to simulate two alternative real wage growth scenarios: 0.5 and 1.0 percentage points above the Social Security Trustees’ 1.13% baseline.

While higher real wage growth does meaningfully improve the program’s finances, it falls well short of closing projected cash-flow deficits (Figure 5). Even under the most optimistic real wage growth scenario, with wage growth nearly doubling compared to current projections, the program would add to publicly held debt each year over the next 75 years.

This is because the formula for initial benefits adjusts past earnings to reflect growth in average wages. Higher wages raise revenues, but they also raise future benefit obligations, which offset some of those revenue gains.

We also tested how inflation affects the program’s cash flows (Figure 6). The higher-inflation scenarios are nearly indistinguishable from the baseline. The slight improvement assuming higher inflation reflects the timing of inflation’s effects: higher inflation increases taxable payroll immediately, while cost-of-living-adjustments (COLAs) increase benefits with about a one-year lag.

We also modeled a potential stagflation scenario, which becomes more likely if post-insolvency cash-flow gaps are covered by borrowing. This scenario mirrors the 1970s by applying the actual inflation and wage growth patterns from 1973–1982 to the period 2032–2041.

Under this scenario, Social Security’s contribution to federal debt would increase by roughly $3 trillion, over the assumed 2032–2041 window, on top of baseline projections.

Conclusion

To conclude, Social Security’s challenges are not just about demographics or the distant future. The program is already adding to federal debt, and policy choices are a primary driver of the imbalance. Without structural reforms, Social Security will remain a significant contributor to the deteriorating US fiscal outlook. Delaying action will only increase the cost of reform and limit policymakers’ ability to protect the most vulnerable retirees.

*The authors thank Krit Chanwong for modeling the scenarios presented in this post. For more information about the open-source Cato Social Security model, please email socialsecurity@cato.org