Inflation is a silent tax—and the most painful way to finance government promises.
Your representatives may finally grab the feared “third rail” of U.S. politics. When the Social Security and Medicare trust funds run out in the early 2030s, the law is clear: Benefits must be slashed. That would mean a roughly 24 percent cut to Social Security checks and an 11 percent cut to Medicare benefits. But Congress almost certainly won’t let that happen.
The easy, though irresponsible, political path may seem obvious: Change the law, keep benefits whole, and pay by borrowing the money. This way legislators won’t have to cast unpopular votes for spending cuts or tax hikes. This makes sense only if the consequences won’t become clear until much later, after voters have forgotten all about it.
What most people are missing is that this time, the consequences may show up quickly. Inflation may not wait for debt to pile up. It can arrive the moment Congress commits to that debt-ridden path.
Unfortunately, this part may not be so obvious to legislators looking at projections.
According to the Congressional Budget Office, borrowing to cover Social Security and Medicare shortfalls would push federal debt to about 156 percent of gross domestic product (GDP) by 2055. These shortfalls account for roughly $116 trillion, including interest, over those 30 years. In spite of all this debt, the projections assume inflation stays low for decades and interest rates only go up very slowly. That calm outlook is misleading.