Social Security’s trust fund is nearing insolvency, and the borrowing binge that may follow will rip through debt markets, economist warns

The latest estimates from the Congressional Budget Office show that the Social Security trust will run out of money by fiscal year 2032, which starts on October 2031.

That means anyone who wins a Senate seat in this year’s midterm elections will be in office when it’s time to fix the entitlement program’s finances. But it will be tempting for lawmakers to avoid making tough political choices like cutting payments or hiking taxes.

Instead, they could decide to finance Social Security’s shortfall with more debt, though that risks swift economic consequences, according to economist Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center.

In a Creators Syndicate op-ed, she warned financial markets would immediately account for the additional borrowing.

“What most people are missing is that, this time, the consequences may show up quickly,” de Rugy wrote. “Inflation may not wait for debt to pile up. It can arrive the moment Congress commits to that debt-ridden path.”

For decades, surplus payroll tax revenue was socked away in the trust fund, which was designed to be tapped when revenue was no longer sufficient to cover benefits. That milestone came in 2010, and the trust fund has been rapidly shrinking since then.

If Congress fails to take any action before insolvency hits, Social Security benefits would be paid only with revenue that comes in. The Committee for a Responsible Federal Budget has estimated that a typical couple aged 60 today retiring at insolvency would face an $18,400 cut.

The CBO’s baseline forecast assumes payments will stay on their current trajectory after the trust fund runs out. Meanwhile, it also has penciled in relative calm in interest rates and inflation over the next decade.

But de Rugy said that outlook is misleading, given that the value of government debt is based on investor confidence in primary surpluses being enough to meet obligations.

“When the belief weakens, markets don’t just sit around and wait for the reckoning,” she explained. “They adjust immediately. And in the United States, that adjustment usually shows up as inflation.”

She pointed to the $5 trillion in pandemic-era stimulus that was financed with debt and wasn’t followed up with any austerity. Inflation followed and hit a high of 9%, weakening the dollar and repricing government debt to match expected future primary surpluses.

The fallout from a borrowing binge to shore up Social Security could be even worse, as investors are unlikely to give Congress a grace period to figure out a more sustainable solution, de Rugy said.

“If they reprice U.S. debt right away, prices could rise much faster than official forecasts suggest—perhaps almost immediately,” she predicted. “Not because the debt is huge (that’s already true), but because people no longer trust the plan behind all that future debt.”

Once inflation takes off, the Federal Reserve will be in a no-win situation: hike rates to restore price stability while also driving up debt-servicing costs, or tolerate higher inflation to avoid worsening the debt picture.

Bernard Yaros, lead U.S. economist at Oxford Economics, similarly assumed in a note last year that Congress would initially seek a more politically expedient path by allowing Social Security and Medicare to tap general revenue that funds other parts of the federal government.

“However, unfavorable fiscal news of this sort could trigger a negative reaction in the US bond market, which would view this as a capitulation on one of the last major political openings for reforms,” he wrote. “A sharp upward repricing of the term premium for longer-dated bonds could force Congress back into a reform mindset.”

Eventually, this revolt from bond vigilantes will make lawmakers bite the bullet. That will take the form of cuts to non-discretionary programs, like Social Security, because discretionary spending is a smaller share of total government outlays, he noted.

“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,” Yaros said.

This story was originally featured on Fortune.com