Social Security’s Role in Stabilizing the U.S. Dollar and a Debt-Based Economy

Introduction

The United States operates a debt-based economic system in which government debt (U.S. Treasury securities) underpins the financial markets and the U.S. dollar’s global standing. Within this system, the Social Security program – funded by payroll taxes and running large trust funds invested in Treasuries – plays a pivotal but often misunderstood role. Far from being merely an “expense” or “entitlement” to cut, Social Security supports monetary and fiscal stability through multiple channels: it is a major holder of federal debt, its inflows and outflows create steady liquidity cycles, and its benefit payments sustain consumer demand. This article provides a comprehensive analysis of how Social Security contributes to the stability of the U.S. dollar and economy, and how misguided policy or rhetoric about the program’s finances could undermine that stability. We will examine:

• Trust Funds as Treasury Investors: How the Social Security Trust Funds purchase and hold U.S. Treasury securities, effectively financing government debt and supporting the dollar.

• Payroll Tax and Benefit Cycles: How the collection of payroll taxes and payout of benefits create continuous liquidity loops that moderate economic fluctuations.

• Stabilizing Consumer Demand: How regular benefit outflows to retirees maintain consumer spending and money circulation (velocity) in the economy.

• Risks of Cuts or Changes: How significant reductions or changes to Social Security could destabilize bond markets, reduce domestic consumption, and alter government borrowing needs in harmful ways.

• Political Rhetoric vs Economic Reality: How political narratives often mischaracterize Social Security’s economic role, potentially fueling destabilizing policy decisions.

These topics are framed in the context of modern monetary theory (MMT), U.S. debt issuance practices, and the dollar’s hegemonic status. Historical and recent data on trust fund balances, cash flows, and Treasury debt holdings are presented, alongside charts summarizing key figures.

Social Security Trust Funds as Stabilizers of U.S. Debt and the Dollar

One critical mechanism through which Social Security supports the financial system is the investment of its trust fund reserves in U.S. Treasury securities. By law, all Social Security surplus revenues are converted into special-issue Treasuries, making the trust funds major creditors to the U.S. Treasury (Social Security: The Trust Funds) (Social Security: The Trust Funds). In essence, the program lends its surplus to the federal government, which uses that cash for other expenditures. This arrangement has several stabilizing effects on the federal debt and the U.S. dollar:

• Captive Financing of Government Debt: The Social Security Trust Funds hold roughly $2.8–2.9 trillion in Treasuries as of 2023 (Answers to Questions for the Record Following a Hearing on Social Security's Finances), making Social Security the single largest domestic holder of federal debt. At times, the trust fund portfolio has represented about one-fifth of all Treasury debt outstanding (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute). These holdings are part of “intragovernmental debt,” i.e. debt the government owes to itself. For perspective, about $6 trillion of U.S. gross debt is held by government accounts (including Social Security) rather than the public (Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton - LSE Review of Books). This reduces the amount of U.S. debt that must be absorbed by external investors or foreign creditors, easing pressure on bond markets and helping keep interest rates low. The U.S. government effectively has a built-in, reliable buyer for a large chunk of its debt – a stabilizing factor for the dollar’s value, since it signals confidence (the government is, in a sense, backing its own currency by investing in its own bonds). As economist Stephanie Kelton notes, it may seem strange that the government owes money to itself, but this internal debt is a unique feature that strengthens the system (Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton - LSE Review of Books).

• Reducing Publicly Held Debt and Interest Costs: Because Social Security ran surpluses for decades, it reduced the need for the Treasury to borrow from the public. The Congressional Budget Office (CBO) observes that debt held by the public is lower than it would be without past Social Security surpluses (Answers to Questions for the Record Following a Hearing on Social Security's Finances). Instead of issuing more bonds to outside investors, the government was able to finance deficits by crediting the trust fund. Importantly, interest on those special-issue bonds is paid into the trust funds themselves (essentially one government pocket to another) rather than to external creditors. In 2019, for example, intragovernmental interest payments to Social Security meant that cash interest paid to public holders of U.S. debt was about $221 billion instead of $327 billion – the difference being the interest credited internally to the trust funds (Social Security Trust Fund Cash Flows and Reserves). This relieves short-term cash pressure on the Treasury and helps avoid rapid expansions of publicly traded debt. The trust fund interest is an accounting entry that defers cash outflow, supporting fiscal flexibility and, by extension, the stability of the dollar (since the government can meet obligations without resorting to distortionary measures). As one Social Security Administration analysis put it, while some call the trust fund “accounting fictions,” the reserves and interest income are “as real as those of any bank account” (Social Security Trust Fund Cash Flows and Reserves) – they represent concrete claims on the Treasury that have so far been honored without issue.

• Supporting the Debt Ceiling and Dollar Credibility: Intragovernmental debt, including Social Security’s holdings, counts toward the official debt limit (Social Security: The Trust Funds) (Social Security: The Trust Funds). Paradoxically, this means Social Security’s large balance can hasten debt-ceiling showdowns, but it also highlights the government’s capacity to finance itself. The trust fund balance (about $2.79 trillion at end of 2023 (Social Security: The Trust Funds)) is money the Treasury owes to the program. When those bonds are redeemed to pay benefits, the Treasury must either use tax revenue or issue replacement debt to the public. This built-in refinancing need is well-known and anticipated – for example, the main Old-Age and Survivors Insurance (OASI) trust fund (about $2.7 trillion of the total) is expected to be drawn down over the next 10–15 years as the Baby Boom generation retires (Q&A: Gross Debt Versus Debt Held by the Public-Tue, 09/19/2023 - 12:00 | Committee for a Responsible Federal Budget). Crucially, because the market and policymakers have long warning of this, it anchors expectations about future Treasury issuance. Markets can price in that a certain share of new bond supply will simply be transferring debt from the trust fund to the public as Social Security redeems its assets. This predictable dynamic can be less disruptive than other shocks to debt markets. Moreover, the existence of large trust fund reserves has historically bolstered confidence in the U.S. commitment to its obligations – Social Security’s bonds are as sacrosanct as any other Treasuries, reinforcing the notion that U.S. debt (and by extension the dollar) is “risk-free.”

Figure 1. Social Security Trust Fund Assets, 1980–2023 (Year-End Balances) – The Social Security Trust Funds grew substantially after the 1983 reforms, peaking at about $2.9 trillion in 2020. This chart shows the combined OASDI trust fund reserves over time (in nominal dollars). The trust fund’s growth reflected decades of surplus payroll tax revenues invested in U.S. Treasuries, effectively financing other government spending. The slight decline after 2020 indicates the beginning of trust fund drawdowns as retiree benefits outpace tax income.
Source: Social Security Administration, OASDI Trustees Reports.

The above figure illustrates how Social Security accumulated a massive stock of Treasuries during years of surplus. In the 1990s and 2000s, these surpluses (the gap between payroll tax income and benefits paid) were used by the Treasury to fund other programs or pay down publicly held debt, thereby supporting the broader debt-based system. By 2000, the trust fund exceeded $1 trillion; by 2010 it reached $2.6 trillion; and it plateaued near $2.9 trillion in the late 2010s (Trust Fund Data) (Trust Fund Data). As of 2023, reserves are around $2.79 trillion (Trust Fund Data). This large, steady presence in the Treasury market has been a source of stability for the U.S. dollar: it helped keep U.S. borrowing costs low and ensured a portion of U.S. debt was effectively locked away in a trust, not subject to the whims of foreign central banks or investors. In the context of dollar hegemony – where global demand for dollars and Treasuries lets the U.S. run deficits at low cost (Dollar Hegemony: America’s Unnamed Empire) (Dollar Hegemony: America’s Unnamed Empire) – Social Security’s trust fund has been an unsung hero: it was a reliable domestic source of demand for U.S. debt, complementing foreign demand. This arrangement allowed the government to finance expenditures (including tax cuts, wars, etc.) without putting all the pressure on external markets, thus indirectly buttressing the dollar’s strength (since confidence in a currency is bolstered when a government can finance itself internally).

In summary, the Social Security trust funds serve as a stabilizing anchor for the U.S. debt system. They represent pre-funded contributions from workers that are cycled into federal debt, creating an intergenerational IOU that ties the health of the dollar to the success of the Social Security system. So long as the U.S. honors these obligations, the dollar is reinforced by the knowledge that a large share of U.S. debt is held by a program serving tens of millions of Americans (a politically powerful commitment). Any proposal to cut or privatize Social Security must reckon with this reality: if the trust funds did not hold those Trillions in Treasuries, the public markets would have to absorb more debt, potentially raising interest rates or weakening the dollar. As one economic analysis notes, “dollar hegemony lets us borrow gargantuan quantities of debt at low interest rates” (Dollar Hegemony: America’s Unnamed Empire) – Social Security has been integral to that process by absorbing debt internally.

Payroll Taxes and Benefit Payouts: A Cyclic Liquidity Loop

Social Security operates largely on a pay-as-you-go basis, meaning current workers’ payroll taxes fund current retirees’ benefits (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute). This creates a continuous loop of money flowing into and out of the economy in a way that can smooth economic cycles. Every pay period, employers and employees send FICA payroll taxes to the Treasury (12.4% of wages up to a cap, split between worker and employer). Those funds are immediately used to pay benefits for the roughly 67 million Americans who receive Social Security each month (Social Security Beneficiary Statistics). If there is any surplus on a given day or year, it goes into the trust fund (as Treasuries); if there is a shortfall, the Treasury redeems some trust fund bonds to cover benefits (Social Security Trust Fund Cash Flows and Reserves). The result is a virtuous liquidity cycle:

• Regular Inflows from Payroll Taxes: During periods of economic expansion, more people are employed and wages rise, generating higher payroll tax revenue. Social Security’s income (primarily from taxes) was about $1.35 trillion in 2023 (Summary: Actuarial Status of the Social Security Trust Funds). This steady inflow withdraws a portion of workers’ earnings from the consumer economy and channels it into the Social Security system. In boom times, this can act as a mild brake on excessive consumption or inflation (since some money is siphoned off as savings in the trust fund). Indeed, from the mid-1980s through late 2000s, Social Security ran annual cash surpluses, removing liquidity from the private sector and investing it in Treasuries – an effect analogous to government saving that helped prevent overheating. These inflows are highly reliable; while income tax revenues fluctuate significantly with profits and capital gains, payroll taxes are more stable across the business cycle because they tax labor income directly and immediately.

• Consistent Outflows to Beneficiaries: Social Security pays out benefits on a monthly schedule, injecting about $1.39 trillion in 2023 into the hands of retirees, disabled workers, and survivors (Summary: Actuarial Status of the Social Security Trust Funds). Crucially, these outflows remain steady even during economic downturns. Unlike wage income (which can fall if you lose your job) or dividends (which can be cut in a recession), Social Security checks do not shrink in recessions – in fact they usually rise annually with cost-of-living adjustments (COLAs). This means that when a recession hits and overall consumer income contracts, the income of Social Security beneficiaries remains stable, propping up aggregate demand. Programs like unemployment insurance are well-known automatic stabilizers; Social Security operates in a parallel way: it guarantees a base level of spending power to millions of households regardless of the business cycle. Studies have found that such automatic stabilizers prevented recent recessions from being worse by generating additional economic activity when private demand faltered (Economic Downturns: Effects of Automatic Spending Programs and Taxes | U.S. GAO) (Economic Downturns: Effects of Automatic Spending Programs and Taxes | U.S. GAO). Social Security’s spending is “automatic” in that it does not require new legislation during a downturn – benefits continue based on earlier contributions and formulas, injecting purchasing power when it’s needed most.

• Daily and Annual Liquidity Balancing: The Treasury manages Social Security cash flows on a daily basis. For example, on a day when $X billion of payroll taxes come in and $Y billion of benefits are due, the trust fund will purchase Treasuries with any excess or redeem Treasuries if there’s a shortfall (Social Security Trust Fund Cash Flows and Reserves). The net effect is equivalent to using current taxes plus any necessary draw from the trust fund to pay benefits (Social Security Trust Fund Cash Flows and Reserves). This ongoing exchange means that every dollar of payroll tax is cycled back into the economy either via benefit payments or via government spending financed by the trust fund investment. There is a circular flow: workers’ earnings → taxes → Social Security → retirees’ pockets → consumer spending → businesses → wages. In effect, Social Security facilitates an intergenerational flow of funds that keeps money moving through the economy. This cycle can help stabilize the velocity of money – retirees tend to spend their benefits on essentials, ensuring that the money circulates, rather than accumulating idly in savings. Younger workers, on the other hand, may have higher savings rates or debt repayment; by transferring some of their income to current seniors, the program actually boosts immediate consumption relative to a scenario where everyone only saves for their own retirement.

Figure 2. Social Security Income vs. Cost, 1980–2023 – This chart shows the program’s annual income (green line) and expenditures (red line). For many years, income (primarily payroll taxes, with some interest) exceeded benefit costs, producing surpluses that grew the trust fund. Since around 2010, costs have risen to roughly equal income, shrinking the surplus. These flows demonstrate how Social Security automatically adjusts: in good times (1980s–2000s) it accumulated extra funds (with income above outgo), and in more recent years as the population aged, it uses those reserves (outgo catching up to income). The consistent rise in both lines reflects growth in the economy, wages, and benefit obligations. 
Source: Social Security Administration data (OASDI Trustees Reports).

As illustrated in Figure 2, Social Security’s cash flows mirror demographic and economic trends in a stabilizing way. From 1980 through 2008, the green line (tax income) stays above the red line (costs), indicating net contributions to the system – effectively withdrawing some spending power from the economy and storing it (which helped cool expansionary pressures slightly). After the late 2000s, the lines converge; by the 2010s, costs slightly exceed non-interest income, requiring interest or asset drawdowns to cover benefits (Answers to Questions for the Record Following a Hearing on Social Security's Finances) (Answers to Questions for the Record Following a Hearing on Social Security's Finances). This meant the program flipped to providing a mild fiscal stimulus (paying out more than it took in) just as the economy struggled with the Great Recession recovery. In fact, since 2010 Social Security has run cash-flow deficits (dedicated tax revenues fall short of benefits) of tens of billions per year (Answers to Questions for the Record Following a Hearing on Social Security's Finances), which adds to the unified federal deficit in budget accounting terms – but from a macroeconomic view, this sustains demand. The CBO notes that in FY2023 Social Security outlays exceeded its tax income by about $145 billion, modestly increasing the deficit (Answers to Questions for the Record Following a Hearing on Social Security's Finances). However, that shortfall simply means the Treasury must finance $145B by other means (like issuing debt to the public) to honor full benefits. Under current law, if the trust fund were ever exhausted (projected ~2035), benefits would be limited to incoming revenue, implying a ~20-25% cut absent reform (Answers to Questions for the Record Following a Hearing on Social Security's Finances) (Answers to Questions for the Record Following a Hearing on Social Security's Finances) – a scenario with serious economic implications, as we explore later.

Economic Stabilizer Effect: Because the Social Security tax and benefit structure is largely fixed by formula, it naturally operates as an automatic stabilizer on the economy. In boom times, higher employment swells payroll tax receipts, and Social Security runs a bigger surplus (draining some extra purchasing power and lending it to the government). In bust times, payroll tax receipts falter (as unemployment rises), but benefits remain the same – forcing the program to use its trust fund (or general revenues) to pay benefits, i.e. the government injects funds at a time when private incomes are down. This mechanism helped in the Great Recession (2008–09): while private retirement accounts lost value and many workers lost jobs, Social Security benefits continued uninterrupted, preventing an even sharper drop in consumer spending (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute) (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute). Unlike private pensions or 401(k)s, Social Security did not cut benefits when markets crashed – “the recent stock market downturn had no direct impact on Social Security” (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute) – insulating beneficiaries and the broader economy from financial market volatility. In short, the program’s design to collect and disburse funds continuously creates a stabilizing feedback loop: it tempers the highs and props up the lows, which in turn contributes to a more stable environment for the U.S. dollar (since stable domestic economic conditions strengthen confidence in the currency).

Steady Outflows to Retirees: Sustaining Consumer Demand and Velocity

A key channel through which Social Security supports the overall economy (and by extension the dollar) is via consumer demand. Social Security is one of the largest sources of consumer income in the United States: nearly 70 million Americans receive benefits, and for many seniors it constitutes the majority of their income (Cuts to the Social Security Administration Threaten Millions of Americans’ Retirement and Disability Benefits - Center for American Progress). In 2023, Social Security paid out about $1.4 trillion in benefits (Summary: Actuarial Status of the Social Security Trust Funds) – roughly 5% of U.S. GDP – making it a cornerstone of consumer spending. The stabilizing effects on demand and money velocity include:

• Baseline Consumer Spending: Social Security ensures that tens of millions of retirees and other beneficiaries have money to spend on essentials every single month. This creates a stable baseline of consumption that is largely immune to short-term economic swings. For example, even during a recession, retirees will continue buying groceries, paying rent, and filling prescriptions using their Social Security checks. This reliable spending supports businesses and employment in sectors like healthcare, housing, and retail that cater to seniors. Economic velocity – the rate at which money circulates – benefits from this arrangement because the funds paid out by Social Security are quickly spent rather than sitting idle. Retirees generally have a higher propensity to spend (especially those with lower incomes who rely on Social Security heavily). Indeed, more than 7 million Americans over 65 rely on Social Security for 90% or more of their income (Cuts to the Social Security Administration Threaten Millions of Americans’ Retirement and Disability Benefits - Center for American Progress), meaning those dollars get spent on basic needs. If those payments were reduced or delayed, many beneficiaries would immediately cut back on consumption, negatively affecting local economies. According to a January 2025 survey, 42% of Americans over 65 said they could not afford basic food, clothing, or housing without Social Security (Cuts to the Social Security Administration Threaten Millions of Americans’ Retirement and Disability Benefits - Center for American Progress) – underscoring that Social Security benefits are promptly used for necessities, keeping money circulating.

• Multiplier and Spillover Effects: Because Social Security benefits are largely spent, they have a fiscal multiplier effect. Every dollar in benefits generates additional economic activity as it flows through the economy (a retiree’s grocery purchase is income for the grocer, which in turn may pay an employee, and so on). This chain effect means Social Security supports not just beneficiaries but also workers and firms in the broader economy. During downturns, this multiplier is especially valuable. The CBO analyzed a scenario where, after trust fund insolvency in 2033, benefits are abruptly cut by about 25%. It found that in the short term, such a cut “would cause consumer spending to decrease, savings to increase (as some people save more for retirement), and overall demand for goods and services to decline.” (Answers to Questions for the Record Following a Hearing on Social Security's Finances) Lower demand means lower output and likely higher unemployment in the near term. Conversely, if benefits were increased (or not cut as scheduled), the short-run effect would be higher consumer spending and demand (Answers to Questions for the Record Following a Hearing on Social Security's Finances). In other words, Social Security benefits have a positive short-term multiplier: maintaining or boosting them raises GDP in the near term, while cutting them contracts GDP relative to baseline. This dynamic is crucial for monetary stability – a strong, stable dollar is underpinned by a healthy domestic economy. Large benefit cuts could induce a recession or deflationary pressures, which could weaken the dollar’s purchasing power internally and shake confidence externally.

• Reducing Economic Inequality and Supporting Broad-Based Demand: Social Security is a major tool of income redistribution across age (and to some extent class, since it provides a progressive formula favoring lower earners). By providing a floor of income in old age, it prevents extreme poverty among the elderly – the poverty rate for seniors would be over 35% instead of around 10% without Social Security, according to various analyses. This not only is a social good, but also supports consumption: lower-income households (which many seniors would be without benefits) tend to spend a higher share of each additional dollar than wealthier households. Thus, Social Security transfers money that might otherwise be saved (when collected as taxes from workers, especially higher earners) and puts it into the hands of beneficiaries who will spend it. This recycling of funds from higher-saving cohorts to higher-spending cohorts increases the velocity of money. In a debt-based economy, where money is often created through lending, having a steady turnover of money via consumption helps sustain the credit cycle as well. Businesses have more reason to invest and borrow if they see stable consumer demand, and banks can lend confidently, knowing a significant segment of consumer income (Social Security checks) is not at risk of disappearing in a downturn. In sum, Social Security bolsters what Keynesian economists call aggregate demand – a pillar of economic and price stability.

• Confidence During Crises: When extraordinary shocks hit (e.g. the 2020 COVID-19 pandemic), Social Security benefits provide an automatic stabilizing influence. During COVID, for instance, while many workers faced layoffs or reduced hours, Social Security beneficiaries continued to receive full benefits. This helped prevent an even deeper collapse in consumer spending. Policymakers often respond to crises with ad hoc stimulus (e.g. stimulus checks, enhanced unemployment benefits), but Social Security was an ongoing source of stimulus by design. This reliability can also support the financial system’s stability: a predictable flow of benefit payments means, for example, that banks and landlords know many seniors will be able to pay their mortgages or rents, even if younger workers are struggling – reducing default risks in certain markets. The U.S. dollar’s safe-haven status can partly be attributed to such robust automatic stabilizers that make the U.S. economy more resilient. Investors buying U.S. assets (or other countries using dollars) take confidence in the fact that the U.S. has mechanisms like Social Security that prevent economic free-fall, thereby protecting the long-run value of the dollar.

In conclusion, the consistent outflow of Social Security benefits acts as a stabilizing force on consumer demand. It smooths consumption over people’s lifetimes (workers save via payroll taxes and consume in retirement via benefits), which aligns with optimal macroeconomic stabilization. A world without Social Security would see far more volatile spending patterns – workers might spend more when young and then drastically cut back when old, or workers might save excessively and reduce consumption during their prime years due to fear of an unprovided old age. Either scenario would likely lead to less economic activity and more frequent gluts or shortages of demand. By mitigating these issues, Social Security supports a stable economy, which undergirds a stable currency.

The Risks of Cutting Social Security: Bonds, Borrowing, and Destabilization

Given Social Security’s integral role in the U.S. debt-money cycle and in sustaining demand, significant changes or cuts to the program could have destabilizing effects on multiple fronts. Proposals to cut benefits, raise the retirement age, reduce cost-of-living adjustments, or privatize part of the system often focus on improving federal finances on paper – but they may ignore knock-on effects in the bond market, domestic consumption, and government borrowing behavior. Key risks include:

• Disrupting Bond Markets and Interest Rates: If Social Security benefits are cut without reducing payroll tax revenues equivalently (for instance, cutting benefits to lower costs while still collecting the same taxes, thus increasing annual surplus), the trust fund would shrink more slowly or even continue to grow. On the surface this might sound fiscally prudent, but consider the implication: the government would owe more to the trust fund in the future, and in the meantime Social Security would be investing even more in Treasuries. Initially, that might keep interest rates low (more government self-financing), but eventually, as the demographic tide turns, those larger reserves must be paid out – meaning a larger deluge of Treasuries to redeem later. Alternatively, if a cut in benefits is paired with a cut in payroll taxes (as some privatization schemes suggest), then the trust fund could be depleted faster, and the Treasury would immediately need to borrow more from the public to fund current benefits. In either case, a sudden change in Social Security’s cash flow alters the supply-demand balance in the Treasury market. The trust fund’s predictable transactions (investing surpluses, redeeming bonds when needed) help Treasury plan its debt issuance. Major policy changes could surprise bond investors or require the Treasury to float a lot more debt publicly in a short span. For example, imagine Social Security’s trust fund was allowed to invest in private markets or was partially privatized – that means less automatic purchase of Treasuries, potentially driving up yields unless other buyers fill the gap. The current system, for its flaws, provides a captive buyer for roughly $2.8 trillion of debt; reducing that role risks higher borrowing costs for the government if markets demand better terms to absorb additional debt. Higher U.S. interest rates could attract capital and strengthen the dollar in the short run, but they also increase debt service costs and could undermine confidence in debt sustainability in the long run, ironically putting the dollar’s standing at risk.

• Lower Domestic Consumption and Growth: Social Security benefit cuts would directly take money out of consumers’ hands, likely leading to a drop in spending. The CBO projects that if benefits were limited to what incoming taxes could pay after trust fund exhaustion (a ~25% cut in 2034), the short-term effect would be a noticeable decline in output relative to baseline (Answers to Questions for the Record Following a Hearing on Social Security's Finances). People might save more during their working years in anticipation of lower benefits (reducing consumption when the cut is enacted), and retirees receiving less would tighten their belts. With less consumer demand, businesses could invest less and hire fewer workers, creating a drag on growth. This has a circular effect: a slower economy means less tax revenue, potentially offsetting some of the intended fiscal savings from cutting benefits. In other words, aggressive Social Security cuts could be self-defeating fiscally because they shrink the economy and tax base. Furthermore, reduced consumption would mean lower velocity of money, possibly leading to deflationary tendencies (which central banks fear because it increases the real burden of debts). A debt-based system like ours is particularly vulnerable to deflation – if prices and incomes fall, debt payments become harder to make, risking defaults and financial instability. By propping up demand, Social Security helps avoid this debt-deflation spiral. Removing that prop without another safety net could make the economy (and thus the value of the dollar) more volatile.

• Shifting Borrowing Behavior and Private Debt: If Social Security is scaled back, individuals might respond by borrowing more or saving more on their own for retirement. Neither outcome is clearly beneficial to macro stability. If they save more (consume less) during working years, that reduces aggregate demand (a headwind for growth, as mentioned). If they borrow more – for instance, taking on more student loans or mortgages earlier in life with the plan to pay them off in lieu of having Social Security later – that could increase private debt levels. The U.S. already relies on consumer debt to drive growth; adding to it could increase default risks or make the financial system more fragile. Social Security, by providing a defined benefit, reduces the need for households to incur debt to support elderly family members or to hedge against living very long. Cutbacks might force younger generations to take on the financial burden of supporting aging relatives, possibly via loans or credit if they lack savings, thereby raising private indebtedness. More broadly, part of modern monetary theory’s insight is that if the government doesn’t provide a needed good (like retirement security), the gap might be filled by private credit creation – which can be less stable and more prone to crises. Thus, cutting a public, monetarily sovereign program could simply transfer obligations to the private sector in a way that’s less sustainable. Government borrowing (via Treasuries held by trust funds or the public) is generally safer and more stable than millions of households borrowing on credit cards or reverse mortgages to support themselves in old age.

• Financial Market and Dollar Confidence: Social Security is sometimes called the “third rail” of American politics because of its popularity. Radical changes or cuts could not only spark public discontent, but also signal to markets a willingness to break longstanding social contracts. If investors perceive that the U.S. might not fully honor its commitments to citizens (e.g. sharply reducing benefits that were promised), they might worry about other obligations – could this sentiment spill over to doubt about the U.S. honoring its debt? While Treasuries and Social Security benefits are different commitments, a dramatic austerity move on Social Security could be read as political dysfunction or desperation to avoid insolvency. Paradoxically, protecting Social Security can reinforce confidence that the U.S. will also protect the value of its currency and debt. The political turmoil of major cuts might also introduce instability that could rattle markets (similar to how contentious debt-ceiling fights cause jitters). In terms of dollar hegemony, part of the dollar’s global appeal is the relative social cohesion and stability of the U.S. system. Undermining a pillar like Social Security could have intangible effects on soft power and confidence in U.S. governance, indirectly affecting the dollar’s standing.

• Debt Dynamics: On paper, reducing Social Security spending would improve the federal deficit and slow the growth of debt, all else equal. In the long run, a smaller Social Security program could reduce the government’s need to issue debt (since less would be paid in benefits or perhaps payroll taxes could be lowered). However, “all else equal” rarely holds in macroeconomics. For instance, if benefit cuts cause a recession, deficits could actually rise due to lower tax receipts and higher spending on other safety nets. There is also the question of what happens to the trust fund bonds if major changes occur. If benefits are cut and surpluses persist, the government still owes that growing trust fund – it’s just pushing the liabilities into the future (when eventually those surpluses stop and benefits have to be paid, possibly with interest). If, conversely, Social Security were partially privatized (allowing investment in stocks) or transformed such that the trust fund stops growing in Treasuries, the Treasury might lose a key financing source and need to lean more on foreign investors or the Federal Reserve. None of these scenarios clearly benefits U.S. financial stability or the dollar. In fact, gradual adjustments (like modest tax increases or benefit tweaks) that keep the program solvent are widely seen as less destabilizing than sudden cuts (Answers to Questions for the Record Following a Hearing on Social Security's Finances) (Answers to Questions for the Record Following a Hearing on Social Security's Finances). The modern monetary theory perspective would also argue that cutting Social Security to reduce government debt is misguided – as Kelton writes, “the federal government will always be able to fund” these programs (Is Social Security Running Out of Money? No! | Shortform Books) (Is Social Security Running Out of Money? No! | Shortform Books), and the real constraints are inflation and resource use, not the accounting debt. If those MMT arguments hold, then harsh cuts would be an unnecessary self-inflicted wound on economic demand with no gain in a fiat currency system that can issue its own sovereign money.

In summary, drastic cuts or destabilizing changes to Social Security could boomerang: disrupting the Treasury market, harming the economy, and even weakening the fiscal position they were meant to improve. Social Security’s current structure has challenges (an aging population means the trust fund will deplete by 2035 absent adjustments), but the solutions typically proposed – e.g. gradually raising the payroll tax cap, a moderate tax rate increase, or a slight benefit formula change – are manageable and would not shock the system. On the other hand, using exaggerated rhetoric about the program’s insolvency to justify deep cuts could unleash exactly the instability one would want to avoid. The next section delves into how such rhetoric mischaracterizes Social Security’s role.

Political Rhetoric vs. Economic Reality: Myths and Misconceptions

Social Security has often been at the center of political battles, and the rhetoric can become heated and misleading. Understanding Social Security’s true economic role is crucial for sound policy. Some common claims include “Social Security is bankrupting us,” “It’s a Ponzi scheme,” or conversely “Social Security doesn’t affect the deficit at all.” Let’s address how these statements mischaracterize reality and how that can lead to destabilizing policy decisions:

• “Social Security is going bankrupt / insolvent.” It is true that under current law, the trust fund is projected to run out in 2035, after which incoming taxes would cover only ~80-83% of scheduled benefits (Social Security: The Trust Funds) (Social Security: The Trust Funds). But “bankrupt” is a misleading term. Even in that scenario, there’s still substantial income to pay most benefits; and Congress has many options to fill the gap (raise taxes, issue debt, tweak benefits). Moreover, as MMT proponents highlight, a currency-issuing government cannot go bankrupt in its own currency – it can always create dollars to meet obligations (Is Social Security Running Out of Money? No! | Shortform Books). Stephanie Kelton calls the entitlement crisis “phony” and argues it’s used as cover for political agendas (Is Social Security Running Out of Money? No! | Shortform Books) (Is Social Security Running Out of Money? No! | Shortform Books). The danger of the bankruptcy narrative is that it pushes for drastic pre-emptive cuts in the name of solvency, when in fact moderate changes or simply prioritizing payments (as has always happened) would suffice. Economically, crying insolvency can spook the public and markets unnecessarily. It might cause individuals to save more and spend less (if they fear future benefits won’t be there), which slows the economy today. It can also lead to hasty policies that undermine the stabilizing features we’ve discussed. The reality is Social Security can be sustained with political will – the U.S. has run it successfully since 1935, even through wars and recessions. As one analysis notes, the Baby Boomer retirement was fully anticipated and reforms in 1983 were put in place such that Social Security was on sound footing even after the Great Recession (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute) (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute). Thus, alarmist rhetoric about bankruptcy is more likely to do harm (by justifying harmful cuts or neglecting incremental fixes) than good.

• “Social Security is a Ponzi scheme or mere IOUs.” This talking point incorrectly equates the pay-as-you-go design to a fraud. In truth, Social Security is transparent and backed by law – workers’ contributions earn them benefits, and surpluses are invested in the safest asset (U.S. Treasuries). The trust fund bonds are real obligations of the U.S. government, just like marketable Treasury bonds (Social Security: The Trust Funds) (Social Security: The Trust Funds). The notion that there’s “no money, just IOUs in a drawer” ignores that those IOUs are interest-bearing securities guaranteed by the government’s full faith and credit. As shown earlier, these bonds have tangible effects on federal finances and are honored (interest is credited annually, and redemptions occur regularly to pay benefits (Social Security Trust Fund Cash Flows and Reserves) (Social Security Trust Fund Cash Flows and Reserves)). Dismissing them as fake can lead to proposals to default on the trust fund – effectively repudiating debt owed to American workers. Such a move would be unprecedented and likely unconstitutional (since the 14th Amendment upholds the validity of U.S. debt). If the U.S. even hinted at not honoring the Social Security bonds, it could trigger a crisis of confidence in all Treasury debt. Thus, this misconception, if it influenced policy, is profoundly destabilizing to the dollar. Fortunately, policymakers of both parties have so far treated the trust fund bonds as inviolable (no one seriously proposes defaulting on intragovernmental debt). The safer course is to restore actuarial balance via adjustments, not deny the debt. As the SSA’s own analysis concluded, calling the reserves “accounting fictions” is incorrect – they are “as real as any bank account” (Social Security Trust Fund Cash Flows and Reserves).

• “Social Security adds to the deficit (or doesn’t add to the deficit).” Here, nuance is needed. Social Security is often said to be “off-budget” – it has its own revenue stream and trust fund, so in a formal sense, it is separate from the general budget. In years of surplus, it did not add to the unified deficit – in fact, it reduced it (the surpluses masked other deficits). In years of deficit (like now), it does add to the unified federal deficit by the amount of its cash shortfall (Answers to Questions for the Record Following a Hearing on Social Security's Finances). Over the program’s history, dedicated revenues have exceeded payouts by about $2.8 trillion (the trust fund size), meaning on net Social Security has not been a driver of debt growth (Answers to Questions for the Record Following a Hearing on Social Security's Finances). Only recently has it begun contributing modestly to deficits as the population ages. Political rhetoric sometimes swings between blaming Social Security for deficits and insisting that it has **“nothing to do” with deficits. The truth lies in between: Social Security is mostly self-funded, but as the CBO notes, since 2010 it has needed general revenue help (or borrowing) to pay full benefits (Answers to Questions for the Record Following a Hearing on Social Security's Finances). It currently represents a manageable share of the fiscal imbalance (the CBO estimates the 75-year shortfall is about 1.2% of GDP (Summary: Actuarial Status of the Social Security Trust Funds) (Summary: Actuarial Status of the Social Security Trust Funds)). Overemphasizing Social Security’s role in the debt can be misleading – rising healthcare costs and repeated tax cuts have been much larger drivers of debt. Focusing austerity on Social Security (which has a dedicated tax) might ignore more effective deficit solutions. On the flip side, pretending Social Security is entirely walled off can also be unhelpful; if action isn’t taken before trust fund depletion, an abrupt benefit cut would be required by law, which no one wants. The economically sensible approach is to shore up finances gradually (e.g. a slight payroll tax increase or new revenue from taxing very high earners’ wages). This would reinforce confidence in the system’s longevity without shock therapy. Political grandstanding that “we must slash benefits to save the program” mischaracterizes the relatively moderate scale of the issue. The Economic Policy Institute noted that factors like growing wage inequality have contributed to the shortfall, but Social Security has “withstood the test of time” and should be strengthened, not weakened (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute) (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute).

• Rhetoric of Privatization or “market solutions.” Occasionally, political figures argue that the trust fund should invest in stocks for higher returns, or that younger workers should divert part of their payroll tax to private accounts. While such ideas appeal to free-market ideology, they carry significant economic risks. One, the transition costs are enormous – trillions in new debt would have to be issued to pay current obligations if payroll taxes are diverted. Two, it would expose retiree incomes to market volatility, undermining the stability that Social Security currently provides. The 2008 market crash, for instance, would have devastated millions of additional retirees if their Social Security had been in stocks (whereas Social Security payouts went on unaffected (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute)). Politically, after the 2005 attempt to partially privatize Social Security failed, this rhetoric waned, but it resurfaces at times. The stability of the dollar and economy is better served by the risk-free nature of Social Security’s finance (Treasury bonds aren’t subject to stock crashes). Even the Advisory Council on Social Security in 1997 that explored investing in equities acknowledged the enormous risk-shifting implications (Social Security Reform and Financial Markets) (Social Security Reform and Financial Markets). Thus, oversimplified rhetoric that “the market can do better” ignores the insurance aspect of Social Security and could lead to policies that make both retirees and the macroeconomy more vulnerable to shocks.

In sum, political narratives that undermine Social Security’s perceived legitimacy or stability can themselves become a source of economic instability. If the public were convinced to drastically cut back or overhaul Social Security based on a flawed premise, the resulting policy could weaken one of the very pillars that has made the U.S. economy and dollar relatively robust. A sober, factual discussion acknowledges that Social Security is fundamentally a transfer program with huge macro significance: it has kept generations of elderly out of poverty, stabilized consumption, and provided a mechanism for the government to manage part of its debt internally. As such, it should be reformed carefully and strengthened, rather than eroded by fear-driven narratives. Modern Monetary Theory advocates even argue that concerns over its solvency are a “myth” and that the real question is political priority – do we want to provide for our seniors or not, since financially we always can (Is Social Security Running Out of Money? No! | Shortform Books) (Where Does the Fed Get Its Trillions? Ask MMT). Regardless of one’s stance on MMT, it is clear that Social Security’s economic role is far more than just a line item – it’s a balancing wheel in the U.S. economic engine.

Modern Monetary Theory, Debt Issuance, and Dollar Hegemony: The Bigger Picture

Framing Social Security’s impact in the context of modern monetary theory (MMT), U.S. debt issuance, and dollar hegemony provides additional insight into why the program bolsters the dollar-based system. MMT reminds us that a government issuing its own sovereign currency faces no hard financial constraint – it can always create money to pay obligations denominated in that currency. What constrains it are real resources (workers, materials, etc.) and inflation. From an MMT perspective, Social Security is eminently affordable as long as the real economy can provide the goods and services that retirees consume (Is Social Security Running Out of Money? No! | Shortform Books). The existence of the trust fund is viewed as an accounting convention rather than a prerequisite for payment. In other words, even if the trust fund were to hit zero, Congress could simply authorize the Treasury or Fed to credit accounts for benefits (as it did during the COVID stimulus, for example) – the only question is whether doing so would overheat the economy. In practice, because Social Security benefits have been fully absorbed by the economy without runaway inflation (they grow in line with CPI via COLAs), one could argue there is space to fund them indefinitely, especially with modest adjustments. Stephanie Kelton’s work (The Deficit Myth) emphasizes that it is a myth that programs like Social Security must “run out of money” – the federal government cannot run out of dollars (Is Social Security Running Out of Money? No! | Shortform Books) (Is Social Security Running Out of Money? No! | Shortform Books). This view suggests that the primary role of payroll taxes and trust funds is to impose discipline and political accountability, not to literally finance in a mechanical sense.

However, even within MMT, taxing and issuing bonds have purposes – chiefly controlling inflation and managing interest rates. Social Security’s payroll tax serves to withdraw spending power from the economy, which offsets the spending injected by benefits. This helps prevent the transfer program from being inflationary. If in the future the worker-to-retiree ratio declines, an MMT-informed policy might raise taxes on other groups or reduce other spending to curb inflation, rather than cut benefits, because the government can always nominally afford benefits but must mind inflation. The trust fund mechanism, while not needed financially per se, has enforced that kind of discipline historically: e.g., building a surplus in advance of the Baby Boomers was a way to moderate consumption in the 80s–00s (by higher payroll taxes) and then release that saved consumption in the 2010s–30s (by paying out more than current taxes). This is actually quite in line with MMT’s idea of functional finance – adjusting fiscal flows to maintain economic stability over time.

In the context of dollar hegemony, the dollar’s value and dominance come from global trust and demand for U.S. assets (especially Treasuries) (Dollar Hegemony: America’s Unnamed Empire) (Dollar Hegemony: America’s Unnamed Empire). Social Security has been a domestic engine of demand for Treasuries, which complements foreign demand. During the height of the Social Security surpluses, the program was effectively funding part of the U.S. current account deficit by buying Treasuries that the Treasury then used to fund government or repay external debt. This allowed the U.S. to run larger deficits without as much foreign financing. Dollar hegemony also rests on the strength of the U.S. economy and its governance. Social Security contributes to that strength by maintaining social stability (elderly poverty can destabilize societies) and keeping consumer spending robust. It also represents a huge pool of patient capital (the trust fund) that is invested in dollar assets by mandate, taking volatility out of the system.

One can imagine that if the U.S. did not have Social Security and its trust fund, the landscape of who holds U.S. debt would be different – likely, a greater proportion would be in the hands of foreign governments and investors. That could make the U.S. more susceptible to external pressure or to fluctuations in global sentiment about the dollar. Instead, a big chunk is effectively held in trust for American workers. This has probably contributed to why the U.S. could run very high debt-to-GDP and still not face a currency crisis: a large portion of that debt is not at the mercy of market traders, but rather is locked in the Social Security vault, only to be drawn down gradually according to demographic needs. In essence, Social Security’s design allowed the U.S. to “owe itself” a lot of money, which is far more sustainable than owing it all to outside parties (Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton - LSE Review of Books). Countries without such internal creditors might face more exchange rate pressure when debts rise. The dollar’s predominance is both a cause and effect of America’s unique financial system, and Social Security is a distinctive element of that system.

It is also noteworthy that Social Security’s financial operations have, at times, made U.S. deficits appear smaller (when counted in a unified budget) which might have reassured markets and preserved the dollar’s reputation. In the late 1990s, for instance, the U.S. briefly had a unified budget surplus, but that was in part because Social Security surpluses offset other deficits (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute). This “free borrowing” from Social Security reduced the need to crowd out private markets and may have contributed to the low interest rates of that era, aiding investments and growth that strengthened the dollar.

From a geopolitical perspective, the sustainability of Social Security also signals something about the sustainability of U.S. fiscal policy. While entitlement spending is often portrayed as a looming crisis, MMT would argue that as long as the U.S. maintains productive capacity and the political will to tax or adjust, it can meet these obligations. That in turn suggests the U.S. can maintain a high level of debt without default – it can always create dollars to pay bondholders and beneficiaries. Foreign holders of dollars take comfort in the fact that the biggest liabilities of the U.S. government (like Social Security and Medicare promises) are denominated in dollars that the U.S. controls. Of course, if money printing were abused, inflation and dollar depreciation would result. But Social Security’s structure – funded by taxes and with benefits that roughly track inflation – inherently guards against that. It’s not an uncontrolled money spigot; it’s a calibrated system that has so far kept payouts in line with economic growth and inflation. As a result, it has not threatened dollar stability; on the contrary, by improving economic equality and stability, it has arguably enhanced the long-run strength of the dollar.

In summary, placing Social Security within the broader context: It exemplifies how a debt-based sovereign currency system can work to enhance stability and equity. The government issues debt to itself (to the trust fund) and uses tax-and-transfer to manage demand across generations. This helps avoid both inflation (by taxing in booms) and deflation (by spending in slumps), supporting the value of the currency. Meanwhile, the global dollar system benefits from America’s internal stability and the steady supply of Treasuries that Social Security helped manage. Modern monetary theory would endorse expanding or at least preserving Social Security as a way to use fiscal capacity for public good, as there is no technical financial barrier to doing so – only resource and political considerations. Cutting it in the name of reducing nominal debt would be, in MMT eyes, a grave mistake that sacrifices real economic stability for an illusory accounting improvement. The evidence we’ve surveyed supports that notion: Social Security’s contributions to stability are real and significant.

Conclusion

The U.S. Social Security system is far more than a retirement program; it is a cornerstone of economic and monetary stability in a nation that issues the world’s reserve currency. Through its trust fund investments, Social Security has become a key holder of U.S. Treasury debt, effectively supporting the government’s borrowing ability and the dollar’s strength by providing a steady, non-market demand for that debt. Through its design of payroll tax collections and benefit payouts, it creates continuous liquidity loops that help modulate the business cycle – pulling in funds during expansions and pushing out funds during contractions. By delivering nearly $1.4 trillion of benefits annually to Americans, it sustains consumer demand and ensures money keeps circulating, preventing severe demand shortfalls that could undercut growth or the credibility of the dollar.

The analysis shows that drastic changes or cuts to Social Security would reverberate widely: they could unsettle Treasury markets by altering a longstanding financing mechanism, depress consumption and slow the economy (especially in the short run), and perhaps even erode the political and social foundations that underpin the dollar’s dominance. Conversely, preserving and strengthening Social Security – via prudent adjustments to revenues or benefits to keep it solvent – will continue to provide a stabilizing ballast for a debt-driven economy. In the grand scheme, Social Security exemplifies how smart fiscal policy can complement monetary policy: it’s an automatic stabilizer, a form of social insurance, and a partial substitute for private credit that together keep the U.S. dollar-based system robust.

Policy makers, therefore, should recognize Social Security’s true economic role. It is not merely a liability to be minimized; it is an asset to the nation’s macroeconomic architecture. Rhetoric that misframes the issue can lead to choices that undermine the very stability we seek. Instead, viewing Social Security through a holistic lens – as we have done, incorporating historical data and modern theory – one sees that the program supports the U.S. dollar by supporting the economy behind it. As long as benefits are viewed not just as checks to individuals but also as investments in economic stability, the case for protecting Social Security becomes even stronger. The U.S. dollar’s stability has many pillars (military might, rule of law, Fed policy), and Social Security is one of those pillars through its impact on debt and demand.

In closing, the Social Security system demonstrates a successful integration of fiscal policy into a debt-based monetary system to achieve stability and social good. Maintaining this success will require ongoing commitment to the program’s health. With the Baby Boom generation retiring, the trust fund drawdown is a test – but one that can be managed with minor course corrections. The payoff is not only retirement security for millions but also the continued stability of the U.S. economy and dollar. In a time when the debt-based system faces new challenges (rising debt ratios, global competition to the dollar), shoring up foundational institutions like Social Security is both an economic necessity and a moral imperative. The data and analysis here make it clear: Social Security is part of the glue holding the U.S. dollar system together, and a prudent nation would treat it as such in its policy decisions.

Sources:

• Social Security Administration, Trust Fund Reports and Statistical Tables – data on historical trust fund balances and operations (Trust Fund Data) (Trust Fund Data).

• Congressional Budget Office – analyses of Social Security’s fiscal impact and economic scenarios (Answers to Questions for the Record Following a Hearing on Social Security's Finances) (Answers to Questions for the Record Following a Hearing on Social Security's Finances).

• Economic Policy Institute – discussion on Social Security’s design and trust fund holdings (Social Security and the Federal Deficit: Not cause and effect | Economic Policy Institute).

• Center on Budget and Policy Priorities / SSA – clarifications on trust fund mechanics (Social Security: The Trust Funds) (Social Security Trust Fund Cash Flows and Reserves).

• Stephanie Kelton, The Deficit Myth – perspective on MMT and Social Security’s true constraints (Is Social Security Running Out of Money? No! | Shortform Books) (Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton - LSE Review of Books).

• Committee for a Responsible Federal Budget – data on intragovernmental debt holdings (Q&A: Gross Debt Versus Debt Held by the Public-Tue, 09/19/2023 - 12:00 | Committee for a Responsible Federal Budget).

• Center for American Progress – statistics on beneficiary reliance on Social Security (Cuts to the Social Security Administration Threaten Millions of Americans’ Retirement and Disability Benefits - Center for American Progress).

• Stanford Review (Dollar Hegemony article) – context on how U.S. debt and dollar dominance are intertwined (Dollar Hegemony: America’s Unnamed Empire).