Kevin Warsh’s Elephant

Social Security is only six years from insolvency. The Old-Age and Survivors Insurance (OASI) trust fund is projected to be insolvent in 2032, when today’s youngest retirees turn 68, at which point retirees face an automatic 22% benefit cut. On a theoretically combined basis, the OASI and Disability Insurance trust funds will run out in 2034, leading to a 17% benefit cut.
(“Analysis of the 2026 Social Security Trustees’ Report” | CRFB, https://www.crfb.org/papers/analysis-2026-social-security-trustees-report)

This morning we consider Kevin Warsh’s elephant — the plight of the Social Security Trust Fund (and of the many millions who depend on it), along with other related policy issues. Heading our reading list below is a one-hour interview with Claudia Sahm and Randall Quarles, moderated by Robert Sobel. They discussed the June 17 Warsh press conference and policy issues. You will find a link to a CATO discussion of Social Security by Romina Boccia and a link to John Mauldin’s June 19 missive, which discussed Social Security in depth. We also provide a link to my note offering Bill Nelson’s comments about the Fed’s balance sheet, in case you missed it, and one to the CRFB discussion of the federal budget and the Social Security issue.

Consider this chart from the CRFB analysis:

My conclusions follow:

1. The recent Social Security Trustees Report is an eye opener. Most notable is how soon it will run out of money. What’s key here is the inflation assumption, which is currently 2.4%. But Kevin Warsh and his colleagues know that the present rate of inflation as measured by the Consumer Price Index is running higher than 2.4%, and that inflation measure determines annual Social Security payment adjustments. The discrepancy implies that the Social Security Trust Fund will run out of money sooner than expected if the inflation rate is higher than figure used to calculate the projection. A link to the details of the Cost-of-Living Adjustment (COLA) is in the reading list.
2. Kevin Warsh’s elephant derives from the construction of the trust fund. It is now reflective of politics at its worst. The assets of the trust fund are invested in a US Treasury security bearing interest at a statutory formulaic rate. There are two funds: retirement and disability. The retirement fund estimate is to run out of money in 2032. If Congress combines the two funds, then the date extends to 2034 because the disability fund has a long-lived projection of solvency. And remember that the so-called trust fund is really a transfer mechanism for US Treasury debt. If more money comes in than goes out, the fund adds to the book entry Treasury debt. If the opposite occurs, as is now the situation, the US Treasury must sell additional debt to the public. So the Warsh elephant of a decline in the Social Security Trust Fund includes increasing Treasury debt auctions, and that means more pressure on the Fed to stabilize any debt management disruptions.  
3. The so-called Social Security Trust Fund is in dire condition and worsening daily. Everyone in Washington knows that. Yet most of the political residents ignore this real-world problem while pursuing questionable, costly political objectives instead. For example, my congressman, Greg Steube, has proudly introduced a bill to fund an investigation of the ANTIFA organization; if you search carefully, you will find that the ANTIFA organization doesn’t exist. It has no phone, no office, no formal registration, etc. It’s a loosely and ambiguously described viewpoint articulated in different ways by different people. Passage of the Steube bill would result in an expenditure of millions to chase people in a Senator Joseph McCarthy-style witch hunt. Meanwhile, Pinellas County Congresswoman Anna Paulina Luna introduced a bill to add President Trump’s likeness on Mt. Rushmore. The money to fund the ANTIFA investigation and the granite chiseling project would come from the federal budget, and those frivolous expenditures would translate to more federal borrowing. Note that neither Luna nor Steube has offered any serious legislation that may apply to the funding of the Social Security Trust Fund activity that involves payments to many constituents in their respective congressional districts. Why doesn’t Luna or Steube hold town hall meetings? Is it because they know the room will get filled with folks who are likely to be more worried about Social Security payments than they are about chiseling Mt. Rushmore or chasing ANTIFA ghosts?
4. Washington politicians all say that the funds will never miss payments even though the legal construction is for the benefits to drop to a pay-as-you-go system if the trust funds are exhausted. The projected drop would be a 22% cut in benefits. Now you can see why congressmembers are afraid to face their constituents. Picture the shouting match when Representative Luna must defend her bill to chisel granite at Mt. Rushmore when the room full of people yells, “Why are you not protecting my Social Security?” I will leave the answer to Luna.

As for Chairman Warsh and the Fed, financial stability is the foundation that allows the Fed to operate normally in the face of the developing negative fiscal policy of the United States. Importantly, however, the rest of the world no longer trusts us or that foundation the way they used to. The five-year cost of the United States Treasury debt CDS is about 42 bps. At the time of great financial crisis, it was about 8 bps. For comparison purposes, the five-year CDS on the United Kingdom (UK) debt was trading around 13 bps on the same day US was 42, implying that the market-based price of five years of default protection on the creditworthiness of the sovereign government is more than three times higher for the US than for the UK.

I don’t know about your view, but in my opinion that market-based global price comparison is an astonishing revelation about how global market agents are thinking about the US. Please remember that these are market-based transactional prices, not political blather and hyperbole. There are real money institutional buyers and sellers setting the price of default insurance on the US and UK. And the sovereign debt of the world-reserve-currency sponsor (America) has a price three times that of its predecessor (Britain).

The political controversy over the Social Security Trust Fund’s deficiencies and how to fix them is heating up. Senator Elizabeth Warren has offered a view. Here’s an analysis of it and a criticism of the methodology from the Debt Dispatch:

“Senator Warren’s Social Security Numbers Don’t Add Up” | Debt Dispatch,
https://debtdispatch.substack.com/p/senator-warrens-social-security-numbers

Politics says that no politician will survive by voting to cut an existing benefit. We gray panthers will vote them out regardless of political party. Whether they are MAGA or WOKIE, most people say, don’t you dare f___ with my monthly check!

Political and fiscal realities portend changes in how payments are adjusted for cost-of-living, for future retirement ages, or for definitions of disability or other subterfuges that may find their way into the system to trim future payments without making outright cuts. Remember the time when the words “modified adjusted gross income” didn’t exist? That is a hidden method of tax on your Social Security.

I don’t expect Trump do anything. He becomes an ever lamer duck as he alienates those in the Republican Party who are no longer intimidated by him. Inaction means that this issue becomes hot in the next presidential campaign. By then, inflation above the 2.4% current assumption will erode the fund balance faster than current expectations suggest.

Meanwhile, Steven Miller’s attack on younger workers who are now being deported instead of paying into the trust fund will further erode the trust fund’s balance. The Haitian workers who have been in the US for 10 years on temporary asylum status have been paying the tax into the Social Security Trust Fund. Just ask the ones who work in local restaurants or healthcare facilities or hotels. I have spoken with several of these “invisible” workers. They have been paying into the trust fund and working legally, and now they live in fear of ICE snatching them at their job or in the middle of the night. While you’re at it, ask their employers, too, who will tell you how hard it will be to find replacements for hard-working, dedicated, reliable employees who were legally hired and legally vetted when they were employed. The cost of this disruption will be felt nationwide. Mr. Miller seems to have forgotten his family origins and his own immigrant ancestors’ flight from anti-Jewish violence in Eastern Europe to the US back in 1903.

Miller has dealt the economy of the country a powerful blow, weakening the hand of those who try to chart sound fiscal policy. Without Trump to protect him, he might be impeached or thrown out of government. But his departure would not fix the problems he has caused.

All this trust-fund-induced financial burden now confronts new Fed Chairman Warsh. That is the elephant in Chairman Warsh’s conference room in the Eccles building. And that’s where we are as America’s 250th birthday approaches. Have a safe upcoming July Fourth holiday.

Further Reading

“June FOMC meeting: the outlook for US monetary policy,” June 18, 2026| OMFIF,

“The 2026 OASDI Trustees Report” | SSA.gov,
https://www.ssa.gov/OACT/TR/2026/

“Social Insecurity, Surprise Edition” | Thoughts from the Frontline,
https://www.mauldineconomics.com/frontlinethoughts/social-insecurity-surprise-edition

“Bill Nelson – Guest Commentary on a “Minsky Moment” | Kotok Report,

Bill Nelson – Guest Commentary on a “Minsky Moment”

“Analysis of the 2026 Social Security Trustees’ Report” | CRFB,
https://www.crfb.org/papers/analysis-2026-social-security-trustees-report
(By way of disclosure, I am a donor and supporter of the work of the CRFB.)

“Cost-of-Living Adjustment (COLA) Information for 2026” | SSA.gov, https://www.ssa.gov/news/en/cola/index.html

“The Hidden Driver of Social Security’s Fiscal Crisis” | Daily Economy,
https://thedailyeconomy.org/article/the-hidden-driver-of-social-securitys-fiscal-crisis/

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