Lawmakers have known for decades that U.S. entitlement programs are on unsustainable paths as demographics inevitably skew the population older.
Attempts to come up with a fix have gone nowhere, but the expected insolvency of the Social Security and Medicare trust funds by 2034 will serve as a catalyst, with the bond market forcing Congress to bite the bullet, according to Bernard Yaros, lead U.S. economist at Oxford Economics.
“These corrective actions will be painful for many households but are necessary to head off the risk of a fiscal crisis, whereby an abrupt, large decline in Treasury demand relative to supply sparks a sharp, sustained increase in interest rates,” he wrote in a note earlier this month.
Despite lawmakers’ longstanding reluctance to grab the “third rail” of politics and tackle entitlements, he said fiscal responsibility has actually been the rule, not the exception, in U.S. history.
Yaros also noted that President Donald Trump’s policies during his second term signal a “tightening bias” overall, though that assumes his aggressive tariffs as well as cuts to Medicaid and food assistance stay in place.
The future of Trump’s trade policy suffered a major blow on Friday, when a federal appeals court struck down most of his reciprocal tariffs. For now, however, they will stay in place until mid-October to give the Supreme Court a chance to rule.
Social Security and Medicare trust funds
The insolvency of the trust funds next decade will be the key driver for reforms, just as it was in the early 1980s when lawmakers hiked taxes to shore them up, Yaros said.
“For lawmakers to feel the urgency to take corrective fiscal action, voters need to connect the dots between
the unsustainability of the federal budget and their own financial wellbeing,” he explained.
But the tightening that he predicts in the 2030s will mostly take the form of cuts to non-discretionary programs, like Social Security, because…