Delaying Social Security Reform Heightens Risks for Bond Markets and the Economy, Research Finds

Banners commemorating the 250th anniversary of U.S. independence are displayed outside the U.S. Capitol in Washington, D.C., on June 22, 2026.

Photo by Kylie Cooper, Reuters.

Delaying reforms to Social Security could negatively impact bond markets and the broader economy, according to recent research.

The study, published on June 26 by George Mason University’s Mercatus Center, follows the annual Social Security trustees report. The agency estimates that the Old‑Age Survivors Insurance (OASI) trust fund may be exhausted in the fourth quarter of 2032, three months earlier than previously projected. At that point, only 78% of scheduled benefits are expected to be payable.

Accelerating reforms toward the depletion date would heighten fiscal risk and increase the likelihood that legislators will resort to additional borrowing, stressing Treasury markets and the overall economy, according to co‑authors Veronique de Rugy, senior research fellow at the Mercatus Center, and Jason Fichtner, executive director of the LIMRA Retirement Income Institute, an initiative of the insurance trade association LIMRA.

“We consider the impending depletion of the Social Security OASI trust fund in the early 2030s the inflection point that could trigger a fiscal crisis if legislative action is not taken beforehand,” de Rugy and Fichtner wrote.

The Committee for a Responsible Federal Budget, a nonpartisan organization dedicated to educating the public on fiscal policy, also identifies the looming trust fund depletion as a potential turning point for the U.S. economy.

Social Security primarily relies on payroll tax revenue and can supplement benefit payments using its trust funds, which contain prior surpluses plus interest. If the program is allowed to spend beyond those funds—potentially using general revenue—it would require substantial new borrowing, according to the CRFB.

“We have upheld a 90‑year promise that Social Security is a self‑financed, contributory program, which in many ways remains one of our last fiscal constraints,” said Marc Goldwein, senior vice president at the CRFB.

“If we decide we do not need to fund Social Security, we open the floodgate to borrowing far beyond what the nation can sustain. Once that borrowing occurs, we risk a fiscal crisis.”

How trust fund shortfall could create ‘fiscal strain’

Social Security’s trust funds are invested in Treasury securities guaranteed by the full faith and credit of the United States, according to the Social Security Administration. These securities are special issues of the Treasury, considered “just as safe as U.S. savings bonds or other federal financial instruments.”

The government uses borrowed cash and has always reimbursed the program with interest, per SSA. However, without legislation to address the trust fund shortfall, it would be necessary to redeem long‑term securities before maturity, the agency warned.

By pooling the trust funds, lawmakers could extend the depletion dates from the fourth quarter of 2032 to the third quarter of 2034, at which point 83% of scheduled benefits would remain payable.

“But at that point, the bond market will look and say, “We have 12 months to get our act in order; you’ll need another $600 billion or more per year,” Fichtner told CNBC in an interview.”

CRFB cites an even larger figure — $800 trillion of borrowing over a 75‑year horizon in nominal terms, or $180 trillion after adjusting for inflation, Goldwein said.

Recent disruptions to Treasury auction processes may foreshadow future challenges, according to de Rugy and Fichtner.

Foreign holdings of U.S. Treasuries have declined amid global uncertainty and new U.S. tariff policies, Fichtner said. Additional early warning indicators include persistent inflation above the Federal Reserve’s 2% target and rising yields on Treasury Inflation‑Protected Securities, suggesting expectations of continued higher inflation.

The affordability crisis ‘on steroids’

While the research does not anticipate an imminent crisis, early warning signs are already evident, according to Fichtner and de Rugy.

Markets may be expecting Congress to deliver a fiscally responsible solution that avoids large‑scale borrowing. If expectations shift to allow borrowing without fiscal backing, “the market’s revision will not be gradual, nor will the subsequent price adjustment be smooth,” Fichtner and de Rugy wrote.

The absence of Social Security reform creates two primary risks, the research found.

First, borrowing costs across the economy could rise as larger deficits increase Treasury supply, pushing bond yields higher. Sustained deficit spending may crowd out private investment, while interest rates may outpace economic growth, making it difficult to stabilize the debt‑to‑GDP ratio.

Second, investors may doubt that future government revenue will suffice to cover outstanding debt. Rising domestic price levels could erode the real value of government liabilities, prompting inflation. Bonds may react, but their prices may not necessarily decline.

Higher interest rates would crowd out private spending, causing consumers seeking mortgages, auto loans, or credit card financing to face higher rates, Fichtner said.

Interest rates would rise for both the government and consumers, creating a spiral of price increases.

“It’s like the affordability crisis we’re seeing today, but on steroids,” Fichtner said.

If Congress does not act within 12 months of the projected depletion dates, the bond market may begin to adjust its holdings and duration risk, reallocating assets.

Should general revenues fund Social Security, a 4% neutral rate on 10‑year Treasury bonds could rise to 6.6%, according to CRFB’s 2025 research. Consequently, a 30‑year fixed‑rate mortgage could climb from 6.3% to nearly 9%, CRFB estimates.

Reform may provide economic opportunity

Intentional decisions regarding the program’s future could have positive economic effects, according to Goldwein.

“If we make smart choices, we can target Social Security benefits to those who need them and simultaneously promote faster economic growth,” Goldwein said.

Any changes to Social Security, the nation’s largest source of retirement income for most individuals, could alter incentives to save, invest, and work, thereby supporting higher wage growth and overall economic expansion.

In 2019, the CRFB proposed a plan that it says would increase projected economic size by 3.5% to 13% by 2050 and raise the annual growth rate by about 0.25 percentage points. It also forecasts a $8,000 rise in average per‑person income by 2050 and a reduction of debt to roughly 20% of GDP, driven by that growth.

The CRFB plan includes reforms such as raising the retirement age while safeguarding vulnerable 62‑year‑old workers, automatically enrolling employees in supplemental retirement accounts, and counting all work years toward benefit eligibility.

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