This is why the US social security system was never going to work:
When payroll tax revenues exceed payments, these programs “invest” the proceeds in Treasury debt. The Treasury issues that debt to finance other spending, so in effect payroll taxes pay for other spending. The trust funds are not an economic investment, like stocks or bonds. When the payroll taxes are less than payments, as is already happening, the programs redeem Treasury debt. To get the money, the Treasury uses income tax revenue or additional borrowing, to be paid by future income taxes. So, income taxes pay for program spending.
So what happens when Social Security has no more Treasury debt to redeem?
Among longtime Washington hands, the conventional wisdom is that legislators will take the easy route: preserve every benefit, avoid serious tax hikes, and finance the gap entirely with new debt. Benefit cuts are politically unthinkable, and so are large tax increases.
Something about a train not stopping...
According to the Congressional Budget Office, maintaining all Social Security and Medicare benefits by borrowing would add roughly $115 trillion to the deficit over the next thirty years. That’s $70 trillion in shortfalls and the rest in interest payments. On a real basis, using a 2% real discount rate, the present value of that $70 trillion is on the order of $40 trillion—greater than the current $38 trillion national debt. That is also the same amount by which income taxes would have to rise in order to avoid borrowing, and the same present value of the later, larger income taxes that would be needed to eventually repay added debt.
So why is anyone still bothering to buy US government debt?
So far, markets do not appear to believe that Congress will simply borrow everything, enact no reforms, and fail to restore fiscal order. If markets did, we would already see the repricing—rising yields, a weaker dollar, or inflation expectations, and inflation itself drifting upward.
It is not naïveté but a rational expectation that, at the eleventh hour, Congress will again choose some blend of tax and spending adjustments over fiscal abandonment.
"For the public, [the exhaustion of the Social Security and Medicare trust funds] will be the moment the comforting fiction of “self-financed” entitlements gives way to the truth that there must be large benefit cuts, large new taxes (payroll or income), or large new debt that itself must be paid for by even larger later new taxes or spending cuts."
This is all from the first section of the paper. The latter chunks I'm not sure I followed quite as well. For instance,
Inflation is not a mechanical consequence of borrowing; it reflects expectations about fiscal credibility.
Sure, but I'm not sure I agree. If a government was secretly printing tons of money and giving it out to all their friends who were then spending it en masse, I would expect prices to rise in an inflationary manner.
Neither had I heard of the Fiscal Theory of the Price Level before, and I want to do some research on it because I certainly didn't spend enough time with the article to wrap my head around it.