THE ONLY QUESTION IS WHEN: Social Security and Medicare cuts are coming because the bond market will eventually bring Congress to its knees, economist says.

The insolvency of the trust funds next decade will be the key driver for reforms, just as it was in the early 1980s when lawmakers hiked taxes to shore them up, Yaros said.

“For lawmakers to feel the urgency to take corrective fiscal action, voters need to connect the dots between the unsustainability of the federal budget and their own financial wellbeing,” he explained.

But the tightening that he predicts in the 2030s will mostly 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.

Without some reductions, the trust funds will run out of money and retirees would face even more draconian cuts, including a sudden 19% drop across the board for Social Security, as payroll tax revenue becomes the sole funding source for entitlements.

“Therefore, a return to fiscal responsibility in the forecast will be more painful than in prior episodes as it will fall heaviest on federal transfer payments to individuals, which have historically been spared from past belt-tightening,” Yaros said.
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The ability of bond investors to force lawmakers to change course has earned them the “bond vigilantes” moniker, which was coined by Wall Street veteran Ed Yardeni in the 1980s.

James Carville, 1994: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 basball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”