The US Federal budget appears as something Congress actively “sets” each year. In reality, a growing share runs on autopilot – governed by laws passed in prior years and by interest costs tied to past borrowing. That shift matters because it reduces flexibility. When the adjustable slice gets smaller, even well-intentioned efforts to “balance the budget,” “cut waste,” or “fund new priorities” run into a hard constraint: there is less room to move without changing the underlying laws. [1][2]
Office of Management and Budget (OMB) historical data shows a long, clear trend: discretionary spending used to represent most Federal outlays (spending) as recently as the 1960s, and today it represents roughly a quarter. [2] Figure 1 illustrates the same core idea: over time, the “annual choice” (a.k.a. Discretionary) portion shrinks while Mandatory spending and Net Interest take up more and more of the total.
Figure 1. Discretionary vs Mandatory & Net Interest (share of total federal outlays).
Figure 1: US Federal Budget Discretionary % Source: OMB
As the Discretionary component of the budget continues to shrink as a percentage of the budget Congress is left with less flexibility, and fewer tools to combat Fiscal challenges. While this was done intentionally in many cases to ensure that funding for critical programs like Social Security, and Medicare are funded, it has the effect of hamstringing the legislative branch in a number of ways.
1) Smaller Steering Wheel
Discretionary spending is the part of the budget Congress decides through the annual appropriations process. It funds many of the visible functions people associate with government: agencies, staffing, operations, contracts, grants, and a wide range of public services. [3]
As discretionary becomes a smaller share of total outlays, the annual appropriations process controls less of the overall budget. Congress is still making choices, but with fewer degrees of freedom – all but roughly one quarter of the budget is on auto pilot before they even start. The practical result is simple: fewer options exist inside the discretionary part of the budget that can be changed quickly without changing the law.
This is the first flexibility problem. Many public debates treat the entire budget as negotiable every year. It is not. A rising share is effectively pre-committed by statute and by the interest payments on our National Debt. [2][3] Because of this there is less room to swing, move budget to areas that may require it without taking on additional debt, and larger budget deficits.
2) “Automatic” but not “Unchangeable”
Mandatory spending runs based on permanent law: eligibility rules, benefit formulas, payment rates, and automatic adjustments. It does not require an annual appropriations vote to continue. [3] These are essentially the auto pilot components of the Federal Budget.
However, Mandatory spending can be changed. The challenge is that it usually requires changing the underlying statute, which often involves complex policy design, distributional tradeoffs, and longer legislative timelines often met with gridlock in our current political environment. That makes it harder to adjust Mandatory programs as a “quick fix” when budget pressure arises.
This creates a mismatch between politics and mechanics: discretionary levels can be adjusted in annual funding bills, while major changes to large mandatory programs, that take up the majority of the budget, typically require separate authorizing legislation and sustained political agreement. [3] This has the practical effect of making most of the budget off limits each year unless there is consensus on changing components of the mandatory budget, which both parties are often hesitant to do.
3) Entitlements Growth
A major reason the autopilot share grows is that many Mandatory programs are built to scale and expand cost automatically. Spending can rise because:
More people become eligible (demographics)
Per-person costs rise (especially in health care)
Benefit formulas and thresholds adjust over time (indexing, inflation)
Refundable credits and income-tested benefits expand and contract with economic conditions [4]
This is not inherently “good” or “bad.” It is what happens when programs are designed to deliver stable benefits based on rules. But it does mean the budget baseline rises even if Congress takes no new action in a given year.
When that baseline grows faster than revenues, pressure concentrates on the smaller discretionary slice. The consequences show up in visible ways: funding fights, recurring rhetoric about “cuts,” and a sense that budgeting is constant crisis management. The underlying driver is often structural: the baseline is doing what the laws tell it to do. [2][4] The challenge is that the Entitlements component of the budget, in particular Health Care, has grown dramatically over the last few decades and is taking an increasingly larger piece of the budget.
4) Net Interest competes with everything else
Net interest is the cost of financing the US National Debt, in other words the interest paid on the National Debt in the form of Treasury securities (net of certain interest income). [3] It is not a program most people interact with directly, but it draws from the same pool of Federal Budget resources.
When debt levels are high and interest rates rise, interest costs can increase even if no benefit is expanded and no agency is funded more. That creates a second flexibility squeeze: interest is effectively a prior obligation. It gets paid first, and it reduces the dollars available for everything else. The US paid over $1 trillion in Interest on our National Debt, more than the entire US Military budget. [5]
This is one reason budget debates can feel increasingly zero-sum. When more of the budget is committed to mandatory programs and interest, the share left for annual choices becomes smaller, and tradeoffs become more challenging. [2][3]
5) Limited Efficiency Drives
Efforts to improve government efficiency, reduce overhead, and cut waste matter. But they run into arithmetic challenge, even if they eliminated the entire Discretionary budget, roughly three quarters of spending would still occur. While this isn’t practical, or likely, it provides perspective on the limitations of any cost cutting efforts, including the most recent DOGE efforts.
When discretionary spending is only roughly a quarter of federal outlays, it limits how large savings can be if reforms stay mostly inside discretionary programs. Even aggressive discretionary cuts face tradeoffs because discretionary spending includes many visible services and operational functions people rely on. [2][3] The discretionary budget includes many things that would probably surprise many citizens that they are discretionary including Education, the Military, Homeland Security, housing assistance, and medical programs like the CDC, and NIH to name just a few.
Meanwhile, the biggest structural drivers of the budget’s composition shift sit mostly in Mandatory programs and Net interest – areas that do not respond to short-term “efficiency” campaigns in the same way. [2][3]
That is why many high-profile cost-cutting efforts generate headlines but produce smaller results than promised: the biggest budget pressures are often located in the portions that require statutory change or longer-term fiscal adjustments.
What this means for citizens watching budget debates
The practical takeaway is straightforward: the annual budget fight is real, but it is increasingly a fight over a smaller share of total federal spending that limits Congressional flexibility. Big claims about “fixing the budget” without addressing larger Mandatory programs and Net Interest costs should be treated with skepticism – not because reform is impossible, but because the control levers are different. [2][3]
A budget with less discretionary share has less flexibility. That makes it harder to:
Respond quickly to new priorities without borrowing and increasing deficits adding to the National Debt
Reduce deficits through easy cuts
Avoid political brinkmanship in appropriations
Hold decision-makers accountable for the full budget (because only part is voted on annually) [2][3]
The budget autopilot challenge is fundamentally a governance challenge: when most spending is determined outside the annual appropriations cycle, meaningful change requires changing the rules – not just negotiating the yearly slice. [3] The growth of Entitlements and Mandatory spending and Interest are putting more an more pressure on the Fiscal Budget each year, leading to annual structural deficits in budget over $1 trillion a year. In FY 2025 the US Federal Budget was $7 trillion on revenue of $5.2 trillion with a $1.8 trillion deficit added to the $38 trillion National Debt. [6] The long term trend is clear, growing Mandatory spending will continue to consume more and more of the budget and lead to increasingly structural deficits which will compound the challenge as interest payments and entitlements continue to grow. Meaningful change will likely require adjustments to Mandatory programs and reduction in annual deficits through spending cuts and/or tax increases. See our article on Ways out of Debt HERE.
See how well you understand the Finances of America. Every American should understand the basic components of how our Government manages the finances of the Country. Only through knowledge are we able to understand the financial state of the country, and thus the health of the country and from this knowledge the ability to make informed decisions.
“Knowledge will forever govern ignorance; and a people who mean to be their own governors must arm themselves with the power which knowledge gives.”
James Madison
Test Government Finance Knowledge
About how much Revenue does the U.S. Federal government collect in a typical recent year?
Order of magnitude: Federal revenues are in the mid single-digit trillions, not billions. For example, in Fiscal year 2024 the federal government collected about $4.9 trillion in revenue. That was just under 20% of U.S. GDP for that year. Learn more: Federal Revenue overview.
Social Security is a Pay-as-You-Go (PAYGO) system. It is a common misconception that Social Security acts like other investment/retirement accounts that individuals pay into and grow over time. Social Security instead relies on Payroll taxes from today’s workers to finance benefits for today’s retirees, survivors, and disabled workers. The Social Security Trust funds act as a small buffer, but long-run solvency depends mostly on the flow of contributions from current workers outpacing the flow of benefits to current recipients and not on a large pool of invested assets that many believe.
Workers vs. Beneficiaries – The Ratio Math Challenge
Because PAYGO relies on current payrolls, the program’s sustainability is tightly coupled to how many people are paying in relative to how many are receiving. In fact, the system requires several workers per beneficiary in order to keep up with current program expenses. The less workers per beneficiary, the more challenging the finances are for the entire program.
Key Social Security Metrics :
Covered workers (Payers), 2024:~184.0M
Beneficiaries, 2024:~67.9M
Workers per beneficiary, 2024:~2.71 : 1
Workers per beneficiary, 1945:~41.94 : 1
Disability Insurance (DI) share, 2024:~8.3M beneficiaries, ~1/8 of total OASDI
The chart (“Workers to Beneficiaries”) captures the same story: a steady rise in beneficiaries alongside a slower-growing base of covered workers, driving the ratio down from ~42 to ~2.7 over eight decades. Obviously, this is not a favorable trend for Social Security solvency.
Program Sustainability
In a PAYGO system, the ratio of Workers to Beneficiaries is critical – too few and the program runs into challenging finances that don’t work without altering the program. To maintain a steady state Revenue from Worker’s Payroll taxes must equal of exceed Payments to Beneficiaries.
Formula: (Payroll tax rate × Average covered wage × Number of workers) ≈ (Average benefit × Number of beneficiaries)
If wages and tax rates remain constant, a lower workers-to-beneficiary ratio means less revenue per beneficiary. This has long been the 3rd rail of politics that most policymakers do not want to touch – understandably, people who have worked a lifetime with a set of promises and expectations aren’t likely to be happy with reduced Payments, or higher Taxes. However, in order to keep balance, that is exactly what Policymakers must do if the number of workers per beneficiary drops. Policy Makers would be left with making tough decisions to pull one or more of these levers:
Raise Taxes – This could be done with some combination of increases to tax rate, increases in taxable maximum, or greater enforcement.
Reduce Benefits – This could be achieved by reducing benefits, increasing eligibility age, or across-the-board adjustments.
Transfer Resources – This could be done by taking funds from other parts of the budget, and/or taking on more debt.
Improve the Ratio – This would require adding Workers via higher labor-force participation or immigration or reducing Beneficiaries.
What’s been Changing
Social Securities has a number of long running challenges that are not easily overcome that challenge the program solvency and viability. At the end of the day, Social Security is backed by the full faith and credit of the United States, and its unlimited ability to Tax. So Social Security will not go away, but if these macro challenges are not resolved there will likely be changes to the program. Three long-running demographic forces explain most of the ratio’s decline:
Population Aging: The cohort of younger workers is smaller than the cohort or near retirees lowering the ratio of workers to beneficiaries.
Longevity Gains: People are living longer and beneficiaries are collecting for longer.
Lower Fertility: Americans are having fewer children which means less new workers per retiree over time.
Some people use the saying Demographics is Destiny – and these challenges will put additional strain on Social Security viability. The Payroll Taxes for Old Age, Survivors, and Disability Insurance that funds Social Security (OASDI) also includes Disability Insurance (DI) that adds another dimension. With ~8.3M people on Disability Insurance (~12% of beneficiaries), disability incidence and program rules also affect total beneficiary counts and outlays. See our Article on Privatizing Social Security to see the Demographic, and Unfunded Liabilities Challenges.
Bottom line
Social Security (OASDI) works as designed when many workers support each beneficiary. As this ratio has continued to drop from ~42:1 (1945) to ~2.7:1 (2024) and as current Demographic and Longevity changes manifest this will compress Social Securities PAYGO margins, which is why the program’s long-term outlook likely hinges on policy choices that either raise taxes, reduce benefit growth, or find a way to increase the worker base. The mechanics are clear: sustainability is, above all, a Ratio Math problem.
References
[1] SSA, 2025 OASDI Trustees Report, Table IV.B3 “Covered Workers and Beneficiaries, Calendar Years 1945–2100” (historical rows used for 1945–2024).
Inflation is the silent force that eats away at your purchasing power every day. It does not sleep, it does not rest, it keeps coming all the time. It reduces the value of your savings, and eats at your pocketbook every time you buy something. For most Americans that word enters your household through price tags at the store, the rent due each month, or the spikes in utility, subscription, and insurance bills. Headlines tell different stories like “inflation is going through the roof” or “Inflation is easing”, sometimes at the same time! Yet, even when the rate slows, the prices remain higher than before, and individual experiences can diverge sharply from official reports. The news often comes with confusing terms like Headline Inflation, or Core Inflation and they discuss it in “nominal” and “real” terms or use acronyms like CPI and PCE. If you’re confused, you are NOT alone. This is the language used by Economists, Investment Bankers, and Central Bank figures that are looking to measure different parts of inflation, trying to be as accurate as possible. This article dives into those areas to help explain inflation metrics, so you can understand what is happening, why, and how each of these terms are used so hopefully you can make more informed decisions.
What is Inflation?
To help set a baseline for our discussion, lets define inflation. Here is how Webster’s Dictionary defines Inflation:
2 : a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services
In simple terms, inflation is an increase in the cost of goods and services. As prices increase, the purchasing power of your money decreases. When inflation is low and prices are stable that is thought to be good overall. It helps businesses stabilize labor costs, and lowers the value of debt. However, higher or more volatile inflation is something that negatively impacts everyone, and governments and central banks around the world pay close attention to inflation to order to manage it careful to ensure stable prices. Economist use a few different terms to describe why inflation is occurring.
Demand Pull – When there is high demand, and demand exceeds supply prices increase. You can see this effect in action around Christmas time when the latest game console, or in demand toy is hard to find and prices jump dramatically. Some of the causes:
Higher consumer demand and spending
Increased Money Supply
Government Spending
Cost Push – When the supply cost to produce goods and services increase suppliers pass these costs onto consumers. You saw this in the 70’s with the oil embargo, and during COVID with the supply chain issues. Some of the causes:
Higher Material Costs
Higher Wages/Labor Costs
Increased Taxes or Regulations
Disruptions in the Supply Chain
Why Inflation Feels Different Than the Headlines
When you watch the news and they say inflation is up, and they give a number or that it is dropping – if that feels different than what you are experiencing, you are not alone. Every person has their own lived reality, where you live, where you work, your life style, your spending mix (groceries, housing, gas, health care, etc.) are all different and they matter when it comes to how inflation is impacting you. Unsurprisingly, you are unique, and the challenge with metrics is that they attempt to capture large swaths of different areas that produce data that turn into macro metrics that are supposed to represent different groups that may have little to do with your unique situation. For example is you are an professional in finance or technology in an urban metro center than there maybe a higher likelihood of you being a closer match to the CPI Urban index (CPI-U) than someone in a Rural area in the Agriculture, or Manufacturing sector who may more closely track to the CPI Wage Earners and Clerical Workers (CPI-W) index.
Most recently in 2024 we had some significant increases in inflation in a short period. When inflation has a period of rapid rise like that, and then cools off and the rate of inflation slows, you are still at a higher price base than before even if the rate of inflation is lowering. It is little consolation when Politicians say inflation is lowering when costs have already risen and your wages haven’t kept up. So in part, the challenges with inflation are both a communication issue in how to empathize and understand someone’s individual experience with inflation and a technical one on how to capture that impact with metrics and data. This is not to say that the hard working and intelligent people capturing this data are wrong, these metrics are useful at capturing macro level changes over time that are helpful to guide decisions and course corrections for the nation overall. However, in the context of if they match your experience, sometimes for a great number of people, they often do not. In fact there are many articles and stories of exactly the same, and some groups have even created their own tracking that shows some of the disconnect and are worth further review. Here are a few terms to help you understand the inflation landscape, and what they mean.
Inflation Concepts
Headline vs. Core Inflation
When the News mentions inflation, it’s usually referring to “Headline” inflation – the total change in prices for all goods and services tracked by an index known as the Consumer Price Index or CPI. Sometimes they will differentiate and use the word “Core” inflation and this is the same as CPI except it excludes food and energy prices and is known as Core CPI. Why the need? Because those categories (food and energy) tend to have volatile pricing, and to understand the underlying trends of inflation as a whole Economists want to remove the noisy volatile part to see if everything else is rising or just the volatile components. Policymakers use Core inflation to judge long-term patterns, knowing that food and energy prices swing widely with supply shocks, global events, or weather.
Real vs. Nominal: The Dollars You See vs. Your True Buying Power
Two simple but critical terms you should know to help you understand inflation’s impact and how Policy and Economists discuss inflation: “Nominal” refers to the actual dollar amounts seen in your paychecks and bills. This is the non Inflation adjusted amount, and the prices you see every day. While “Real” means the dollars after adjusting for price changes, this is the Inflation adjusted amount. If your wages go up 4% but inflation rises by 3%, the Real increase in purchasing power is only 1%. Real Inflation indexes allow economists, government agencies, and citizens to compare the true value of money over time. For example the purchasing power of $1 in 1930 was the equivalent of $19.34 in 2025 dollars.
Seasonal vs Non Seasonally Adjusted
Similar to Real and Nominal, Seasonal and Non Seasonal are adjustments to the inflation data but are not made for the impact of inflation over periods of time but seasonally within a year due to different buying habits and supply differences each season. Non Seasonally Adjusted (NSA) inflation numbers are the raw numbers they do not adjust for inflation. If Gasoline prices are higher in summer because more people are driving, they do not adjust them. Similarly if fresh produce food prices drop in summer because of abundant supply during the summer months, or if energy prices increase during winter when more people are consuming for heat they do not adjust. Seasonally Adjusted (SA) inflation prices are adjusted, and statistical methods are used try to smooth out and normalize these seasonal difference. This is the number used by most economist and policy makers as it gives a more stable reading of inflation without seasonality.
Chained vs Fixed (Unchained) Weighting
Chained and Fixed Weighting are both methods to capture inflation but they differ in how they measure consumer behavior when prices change. Specifically the substitution effect, or when the price changes does user behavior change with it or does it stay the same and the answer to that question determines the weighting. For example, if beef prices rose dramatically it is reasonable to assume that there maybe some consumer behavior shifts causing some to substitute chicken versus beef. Chained Weighting would evaluate that type of change and not overweight beef, and capture the change in consumer behavior. On the other hand Fixed Weighting remains the same, and does take into account possible changes in user behavior.
Inflation Metrics
One of the most confusing parts of inflation is how it is measured and tracked, not just the terminology but also the fact that there are so many different ways to measure and track it. When you someone mentions inflation they are probably talking about Headline inflation, but not always and these terms are thrown around all the time in different contexts. In the United States there are over a dozen different metrics tracking different forms of inflation. Fortunately, we’re going to help break it all down for you – we’ll discuss each of the individual metrics, and the groupings and who produces them and what they represent. To start the most prevalent metrics in use for inflation are from the U.S. Government, and they primarily come from 2 agencies. The first is the Bureau of Labor and Statistics (BLS) an agency within the Department of Labor. They produce the most common metric known as the Consumer Price Index (CPI) known as the “Headline” inflation metric. The other major agency is the Bureau of Economic Analysis (BEA) an agency within the Department of Commerce. They produce the Personal Consumption Expenditures (PCE) metrics, often used by other agencies like the Federal Reserve. Each of these major metrics (CPI and PCE) has groups of related metrics that provide different variations to help Economists understand the nature of inflation from different angles. Here are the major groupings:
CPI (Consumer Price Index): The CPI grouping of metrics is calculated by the Bureau of Labor Statistics (BLS), the index tracks the cost of a fixed basket of goods and services bought by urban households. There are a few versions of CPI, but when someone says CPI generically, or Headline inflation, or just Inflation they usually are using CPI-U which is for all urban consumers; There is another metric that tracks urban Wager Earners & Clerical workers called CPI-W is used to adjust Social Security payments. It is a subset of CPI-U that tracks the price changes specific to those who work in clerical, sales, craft, service, or other blue-collar occupations. They are not salaried professionals, managers, or self-employed. This was originally created in the early 19th century to track industrial workers.
CPI Methodology
Direct costs – focus on out of pocket, direct expenses
Fixed Basket – constant weighting of basket of goods over 2 years
Collection Method: Household survey
PCE (Personal Consumption Expenditures): This index, preferred by the Federal Reserve, is managed by the Bureau of Economic Analysis (BEA). It covers direct and indirect expenses (like employer-paid health insurance), updates spending patterns more frequently, and uses “chain-weighting” to reflect how buyers substitute when prices shift. Because of this dynamic approach, and that it captures more of the cost it is the reason why the Fed uses it to more accurately model people’s behavior.
PCE Methodology
Direct & Indirect costs – capture out of pocket costs and other employer paid expenses like Medicare.
Chained Weighting – adjust the basket of good to weight for changing consumer habits. If beef prices go up and people substitute chicken, PCE captures the shift in behavior and does not overweight beef.
Collection Method: Business survey
Producer Price Index (PPI): This index tracks prices received by businesses for their output, not what consumers pay, but what companies charge producers (Business to Business). This measures what business pay for supplies wholesale before the retail/consumer market. Often called the “Factory Gate” Index because it measures the cost inputs for supplies to business before they are distributed to consumers. This is often considered a leading indicator as PPI often shows price pressure before reaching consumers.
GDP Price Index & Gross Domestic Purchases Index:
GDP Price Index measures inflation by capturing changes in the prices of all goods and services produced within the United States, including exports but excluding imports. It reflects the cost of production and output of the national economy, helping assess real economic growth by adjusting for inflation by what the country produces.
Gross Domestic Purchases Price Index measures the prices of all goods and services purchased by U.S. residents, including imports but excluding exports. It provides a broader view of inflation from the perspective of what Americans actually buy, capturing price changes in domestic and foreign goods and services consumed within the country.
Types of Inflation Metrics
This table provides a summary of the different Inflation metrics in the US (there are many more, but these are the primary). Importantly, it gives a description of what it is used for and what it covers. It has a description of the products that are covered (often called the basket of good) and how it is weighted (The percentage amount of each category in the metric). From this you can get a better sense of how the metrics are derived, and which impact you most, and how they might changed based on different inputs.
Who
Date
Index
Index Name
Description
Used For
# of Products
How it is weighted
BLS
1978
CPI-U
Consumer Price Index for All Urban Consumers
Price change for a fixed basket of goods & services purchased by urban consumers (~93% of U.S. population).
Headline inflation, Index of Private Contracts/Leases, Treasury TIPs, Federal Poverty level used by Census, some States index for minimum wage
CPI excluding food & energy to view underlying trend.
Used to track the underlying inflation trend by excluding food and energy, helping the Fed and analysts assess persistent inflation for policy and forecasting.
Prices received by domestic producers for output (goods, services, construction).
Tracks the prices businesses receive for goods and services; used to gauge upstream inflation and input cost pressures, set index-linked contract adjustments, and help forecast consumer price trends.
Prices for all goods & services purchased by/for U.S. households (national accounts).
The inflation measure the Fed watches most; it shows how fast household prices are rising and is used to strip inflation out of consumer spending numbers.
The Fed’s main gauge of underlying inflation, excluding food and energy, to judge persistent price pressures and guide interest rate decisions; also used to strip inflation out of consumer spending data.
PCE price index excluding most estimated components; uses observed market transactions.
A version of PCE that uses only actual transaction prices and leaves out items with only estimated prices. Used as a cleaner cross-check on inflation and for clearer inflation-adjusted spending.
For detailed information on the basket of goods and their weightings in CPI, or PCE expenditure breakdowns in more detail see these.
BLS Relative Importance Tables (CPI Category Weights): https://www.bls.gov/cpi/tables/relative-importance/ This page provides detailed tables showing the relative importance (weight) of CPI components for various CPI versions.
Consumer Price Index (CPI-U) and Core Consumer Price Index (Core CPI)
Personal Consumption Expenditures (PCE) and Core Personal Consumption Expenditures (Core PCE)
Who Uses Which Index and Why?
Our Government and various organizations use different metrics for various components that effect American’s everyday lives. Here is a cheat sheet of who uses what?
Who
What they use it for
News Agencies and Media
CPI and CPI-U – Headline inflation number to report on Inflation to public
Social Security
Uses CPI-W for annual cost-of-living adjustments, matching legislation to beneficiary spending patterns.
Tax Code
Federal income tax brackets and thresholds are updated using chained CPI-U to keep pace with inflation over time.
Federal Reserve
Targets core PCE inflation for monetary policy. The Chain Weighted basket of goods more closely mimics consumer behavior and includes both direct and indirect inputs.
Treasury
The Treasury offers inflation protected securities (TIPs and I Bonds) that use non seasonally adjusted CPI-U for inflation adjustments. Understanding this rate can help you evaluate your securities.
US Census
The Census uses CPI-U to update poverty thresholds annually.
National Economic Accounts
Use PCE and GDP deflators to convert raw dollar figures into inflation-adjusted series.
Table 2 Agency Use Cases
How to Pick the Right Index for Your Situation
Here is a cheat sheet of how to use the different metrics and which one might be appropriate for what you are trying to understand.
Your Interest
Metric
Descripton
Your expenses and wages against inflation
CPI-U
If tracking personal expenses or comparing wages/paychecks against inflation, CPI-U is the most direct yardstick.
Your expenses and wages against inflation for industrial, non salaried work
CPI-W
CPI-W more closes tracks expenses for non salaried, non managerial positions.
Social Security COLA adjustments
CPI-W
For retirees, Social Security COLA is based on CPI-W and may differ from personal cost patterns.
Small Business Planning
CPI-U and PPI
Small businesses should compare CPI-U for their costs and PPI for their sales prices.
Landlord, Property Owners for Leases
CPI-U and CPI-W
Landlords or contract writers use CPI-U or CPI-W, depending on their lease or agreement.
Financial Planning
PCE
For financial planning, PCE is preferred for broad purchasing power trends.
Table 3 Personal Inflation Cheat Sheet
Why Multiple Indexes?
No single metric can capture the full range of price changes, consumer habits, and economic shifts. CPI is best for consistent, out-of-pocket price trends. PCE adapts to the complexity of actual consumer behavior, including employer and government paid expenses. PPI shows upstream price pressures from Producers that may end up in Consumer prices via Cost Push inflation. GDP-related indexes help economists and forecasters look at the big picture to understand real Growth versus Inflation. Each is used for decisions that would be ill-served by a “one index fits all” approach.
Summary
Inflation, the terms, the metrics, and way it is discussed and used can be a lot to take in. Hopefully you have a better understanding of the metrics, and how do make sense of them. Knowing that what you feel and what is being reported in the news can and often are different and that is normal even if if it doesn’t make you feel like it represents you. Hopefully you have a better understanding and can recognize which metric is being cited, understanding how it is calculated, and if it is the best for your situation. You should now be able to read inflation news and be able to think critically and understand if it is accurately representing your current economic situation and the country as a whole.
Social Security has long been considered the “third rail” of American politics—untouchable and too risky to reform. After all, millions of Americans have worked a lifetime counting on certain commitments. Changing it after decades of hard work is a difficult political maneuver and not typically well tolerated. But as the program’s financial sustainability erodes, and younger generations increasingly question whether they’ll ever see a return on their payroll taxes (60% between 18-49 don’t believe [23]), calls for partial or full privatization are resurfacing. While once dismissed as politically radioactive, the idea of allowing individuals to invest part of their payroll taxes into private accounts is gaining traction—not only among free-market economists but also younger Americans facing record debt, housing costs, and generational inequity.
This article examines the Social Security program’s origin and challenges, the structure and results of its pay-as-you-go model, the growing unfunded liabilities, and the comparative outcomes of private investment alternatives. We explore real-world comparisons with other OECD Countries systems, provide Treasury Secretary Scott Bessent’s position, and quantify the impact of Social Security on the federal budget and intergenerational equity. The article looks at the Pros and Cons of each position, and provides a comparison.
Social Security Origins: A New Deal Legacy
Social Security was established in 1935 under President Franklin D. Roosevelt during the Great Depression. It was designed as a social insurance program to provide financial support to retirees, widows, and the disabled. The system relies on current workers’ payroll taxes to pay benefits to current retirees, forming a “pay-as-you-go” structure (PAYGO, PAYG) rather than a traditional investment-based pension. The PAYGO system relies on the Government to pay these as budget expenses from tax revenue versus a Private Retirement Account that accumulates value over time and pays for itself.
However, the economics of the original program are starting to have some structural challenges that are not easily overcome. Originally, Social Security had 42 workers supporting each retiree. Today, that ratio is closer to 2.7 and falling, a demographic shift that has made the system increasingly unstable [1], especially as the Population pyramid shifts (See Figure 1).
The Math Problem: Pay-As-You-Go and Unfunded Liabilities
Unlike private retirement accounts that accumulate assets over time, Social Security operates as a transfer program. The payroll taxes paid today are not saved or invested for the contributor’s future—they are immediately redistributed to current beneficiaries, this is the Pay-as-you-Go system (often referred to as PAYGO or PAYG).
The key problem with this structure is demographic: as birth rates decline and life expectancy increases, fewer workers are supporting more retirees. This has produced a growing imbalance. According to the Social Security Trustees’ 2024 report, the program faces an unfunded liability of $22.6 trillion over the next 75 years [2].
Unless major changes occur—either through tax increases, benefit reductions, or structural reform—Social Security is projected to exhaust its trust fund by 2033. At that point, benefits would be automatically reduced by an estimated 23% across the board [3]. This would obviously have major, and negative consequences on many Americans that depend on these payments, and likely be seen as a betrayal on commitments made to them for a lifetime of work.
Demographics not on Social Securities Side
As Lifespans increase the U.S. population is getting older and retired citizens continue to increase as a percentage of the population intensifying Social Security’s funding crisis. As of 2024, individuals under 18 comprise about 21.5%, ages 18–44 about 36%, ages 45–64 about 24.6%, and those 65+ around 18% of the total population. [12]
That shrinking working-age cohort (15–64) relative to retirees creates a high dependency ratio. With fewer contributors supporting more beneficiaries, the strain on the system continues to rise. Since Social Security is a Pay as you Go system and not based on investments that have appreciated over time, if you have an imbalance of working age Payers versus older retired beneficiaries the system begins to fall apart economically without restructuring. This is a Worldwide phenomenon as life expectancies continue to increase and countries that have adopted a Pay as you Go system are exposed to demographic shifts that create challenging economics. In general, for these systems to work you must have a wider middle supporting a tapering, and smaller group in retirement.
Figure 1 Source: US Census
Investment Alternative?
So, economically, how does a Privatized system work versus our current Social Security System? To understand the opportunity cost of the current system, consider by comparison a median-income worker contributing the same amount to a private investment account instead of Social Security. The Social Security tax rate is currently 12.4%, split evenly between employee and employer. For a median income of $60,000 (in 2024), that’s $7,440 annually.
Assumptions:
Starting at age 22, retiring at 67
$60,000 annual wage, growing at 1.5% real wage growth
Contributions: 12.4% of wages invested in an S&P 500 index fund
Historical S&P 500 average real return: 7% [4]
Metric
Social Security
Private Investment
Total Contributions (nominal)
$500,000+
$500,000+
Monthly Retirement Income (estimated)
$1,800–$2,000
$6,000–$8,000
Total Lifetime Benefit
~$500,000–$600,000
~$1.5M–$2.5M+
Table 1 Source: Tax Project Estimate Example
It should be noted, that this is a simple example is using mid range income citizens, and does not model the upper and lower incomes which can have significantly different outcomes. It should also be noted that the Private account is exposed to much higher market risks, than a Government backed account, and there are no guarantees of Market performance, or loss of principle. However, as a base example it is clear that the Private solution substantially outperforms the Social Security program, providing up to 4 times the income (See Figure 2, 3). This obviously could be life changing for many individuals, from barely managing to get by to living a more comfortable life in their retirement.
Comparing Private Investment vs Social Security
Figure 2 Source: Tax Project Example EstimateFigure 3 Source: Tax Project Example Estimate
The compound returns of a private investment account (indexed to the S&P 500) dramatically outpaces the flat benefit structure of Social Security. Even adjusted for inflation and risk, the delta is significant.
This was only an example, your exact numbers will differ based on your income and contributions. If you wish to calculate on your own you may try these resources:
This delta in outcomes, as shown in Figures 2 and 3, exists for a reason. Social Security was not designed as an investment vehicle – it’s a redistributive social insurance scheme. High-income earners subsidize lower-income earners. Healthy workers subsidize disabled ones. Individuals with longer life expectancies (often wealthier, healthier demographics) benefit more than those who die earlier.
This redistribution is intentional. Roughly 20% of Social Security benefits go to survivors and disabled individuals. The rest is retirement support—but even this is progressive: a low-wage worker receives a higher replacement rate (often 90% of their income) than a higher-wage worker (25–40%) [5]. Social Security is not a retirement plan per se, but a tax to create a Social Safety net to distribute money to those in greater need.
Global Comparison of Retirement Benefit Plans
America is not alone in providing Retirement Benefit plans, here is a comparison of the Top 25 OECD countries by GDP Retirement Benefit programs.
Country
Model (Gov’t System)
Mandated Supplemental
Funding Method
Solvency Issues
Return Rate
United States
Public
None (voluntary 401(k) excluded)
PAYG
High
Low
Japan
Public
National Pension + GPIF reserve
PAYG + Asset-Backed
Medium
Medium
Germany
Public
Statutory + Emerging Asset Fund
PAYG + Partial Reserves
Medium
Low
United Kingdom
Public
Auto-Enrolled Private Pensions
PAYG + Mandatory DC
Low
Medium
France
Public
Mandatory Supplementary
PAYG
Medium
Low
Canada
Public
CPP (Asset-Backed, Mandatory)
Asset-Backed
Low
Medium
Italy
Public
None (Voluntary Private Optional)
PAYG
High
Low
South Korea
Public
Basic Pension
PAYG
High
Low
Spain
Public
None (Voluntary Only)
PAYG
High
Low
Australia
Hybrid
Superannuation (Mandatory DC)
Asset-Backed
Low
High
Netherlands
Hybrid
Mandatory Occupational DC
Asset-Backed
Low
High
Mexico
Public
Mandatory AFORE (DC)
Asset-Backed
Medium
Medium
Switzerland
Hybrid
Mandatory Pillar 2 DC
Asset-Backed
Low
Medium
Sweden
Hybrid
Mandatory Premium Pension DC
PAYG + Asset-Backed
Low
High
Poland
Public
Employer PPK (Mandatory Opt-Out)
PAYG + Partial DC
Medium
Low
Belgium
Public
None (Voluntary Private Optional)
PAYG
Medium
Low
Austria
Public
None (Voluntary Private Optional)
PAYG
Medium
Low
Norway
Public
Oil Fund Reserves (Public Use)
PAYG + Sovereign Fund
Low
High
Ireland
Public
None (Auto-enrollment pending)
PAYG
Medium
Low
Denmark
Hybrid
ATP + Occupational Mandatory DC
Asset-Backed
Low
High
Finland
Hybrid
Mandatory Public + Reserve
PAYG + Asset-Backed
Low
Medium
Portugal
Public
None
PAYG
High
Low
Czech Republic
Public
None (Voluntary Private)
PAYG
Medium
Low
Greece
Public
None
PAYG
High
Low
Hungary
Public
None
PAYG
High
Low
Table 2 Source: IMF, Worldbank, SSA, OECD, Mercer CFA Institute
Note that all the Top OECD countries, unlike countries like Chile which are fully privatized, have some sort of either a Public or Hybrid (Public/Private) Retirement Benefit plan. The countries with LOW solvency risk all have some type of Asset Backed solution where investments are made that grow over time, except for Norway which essentially has the same with their National Sovereign Wealth Fund, the largest in the World, contributing instead of individuals. It should also be noted, some what paradoxically, that ALL of the countries that pay High rates of return to their Beneficiaries (highlighted in green on Table 2) ALSO all have LOW Solvency issues, the best of both worlds. Lower financial risks, higher returns using some type of Asset Backed system. In contrast, note the many countries with Public plans with PAYG models that have high HIGH solvency risks, and LOW payouts. The worst of all worlds, and unfortunately that is where America stands today.
Budgetary Impact: Growing Expense, No Asset
From a Federal budget perspective, Social Security is the single largest budget item with $1.4 trillion in outlays in FY 2024, accounting for roughly 20% of total federal spending [8].
Critically, Social Security is not a government asset. It does not generate returns or grow the nation’s wealth—it is a liability that increases over time, as benefit obligations rise with demographics. Unlike a sovereign wealth fund or private asset backed investments, Social Security has no capital base, it is not invested and does not grow in value. It is an ever-growing expense that is a liability for our Government, not a revenue-generating investment.
This funding gap, creates a solvency issue for the fund, and projections already anticipate reduced payouts by 2033 [3]. This will require either new sources of revenue (taxes), reduced payouts, or higher eligibility requirements (higher retirement ages). For many people these are unacceptable outcomes.
Privatization: Arguments Against
Social Security has become a critical component of American lives, and the thought of change is scary. It is meant as a Social Safety Net and anything that minimizes that security, and increases risk is viewed rightly with concern. Critics of privatizing Social Security raise concerns of risk, fairness, and protecting the most vulnerable.
1. Loss of the Redistributive Function
Social Security is not just a retirement program—it’s a progressive, redistributive system that transfers income across generations and income levels.
From higher earners to lower earners (due to progressive benefit formulas)
From healthy individuals to those with disabilities or survivors
Across gender and racial wealth gaps
Privatization, by design, makes benefits directly proportional to contributions and investment returns, which eliminates these transfers. This could weaken the social contract, especially for groups who rely most heavily on the system—such as lower-income workers, women, minorities, and the disabled.
2. Erosion of the Universal Safety Net
The current system provides guaranteed income, indexed to inflation, for life. This protects against:
Longevity risk (outliving one’s assets)
Market risk (mismanagement of assets or retiring into a downturn)
Cognitive decline (mismanaging funds in old age)
Disability (declining or limited physical abilities shorten working career)
Wealth Gap (offset lower income participants with relatively higher benefits than higher income groups)
Security (Income for the life of the beneficiary guaranteed)
Spousal (Income for dependent widowed spouses)
Depending on the implementation, Private accounts would shift this burden to individuals, many of whom may lack financial literacy or stability to manage these risks. Even with lifecycle funds and default allocations, the system would no longer guarantee baseline income, exposing millions to potential poverty in old age.
3. Market Volatility and Distributional Inequality
While long-run market returns are historically strong, retirement outcomes under private accounts would vary significantly based on:
Career timing (Market returns vary considerably based on time period e.g., retiring in 2009 vs. 2021)
Investment choices and fees (Loss of principle, poor investment decisions can greatly effect outcomes)
Economic cycles and policy shocks (Macro economic cycles and events like Covid or Wars can greatly impact returns)
Markets are inherently riskier, and Privatization would transfer this risk from the government to the participant. This also introduces intra-generational disparities – two workers with identical careers and investments could end up with vastly different outcomes. Such disparities undermine the risk-pooling foundation of Social Security.
4. Administrative Complexity and Cost
Privatized systems, especially those with choice, may entail higher a variety of extra costs that would be born by the participant.
While centralized custodial platforms managed by the Government can mitigate this, this can all add costs. Currently, the U.S. lacks the institutional infrastructure to support this function.
Privatization: Arguments For
Proponents of private investment accounts argue that the objections to privatization, while valid, are either addressable through design or outweighed by the substantial gains in individual and National financial outcomes. That privatization can increase the material wealth of the country, and put the Nation on a better fiscal course, and that it matches our countries philosophical principles of liberty and ownership.
1. Higher Long-Term Returns and Quality of Life
S&P 500 index funds have returned 6–7% real annually historically, far outpacing the 0–2% implicit return Social Security provides many younger or higher-income workers.
This delta compounds over decades. A median-income worker could retire with 3x or better lifetime income under private investment—even after inflation dramatically improving the quality of life for some populations.
These higher balances could allow for:
Earlier retirement (retirement is about wealth, not age)
Higher consumption in retirement (being able to afford more of the things that add to a quality life)
Improved generational quality of life (being able to pass wealth between generations instead of take it)
2. Intergenerational Wealth Transfer and Ownership
Social Security benefits terminate at death. There is no residual asset to pass on.
Private accounts create inheritable wealth—allowing families, particularly in lower-wealth communities, to build intergenerational assets and break the cycle of dependency.
3. Promotes Individual Liberty and Economic Agency
Privatization returns control to individuals, allowing them to decide how their retirement assets are invested.
This aligns with broader American values of personal choice, property rights, and economic freedom.
4. Transforms a Fiscal Liability into a National Asset
Social Security is currently a growing budgetary liability, with unfunded liabilities exceeding $22 trillion [21].
Private accounts would instead become national household assets, increasing capital formation, savings rates, and investment capacity -similar to the effect of Australia’s superannuation system, which now manages over $2.5 trillion in assets [22].
5. Mitigated Market Risk with Sound Design
Critics overstate market risk in multi-decade investment horizons. Over any 40-year period in U.S. history, a diversified equity portfolio has never yielded a negative real return and has significantly outperformed Social Security funding.
Risks can be reduced or neutralized via:
Lifecycle/default funds
Mandatory annuitization
Capital buffers
Minimum return guarantees (e.g., 2% real floor)
Subsidization of at-risk groups via general revenues or redistribution of Capital Gains from Privatization
6. Fixes System Insolvency Without Raising Taxes
Privatization bypasses the demographic death spiral of the current pay-as-you-go model.
Instead of higher payroll taxes or benefit cuts, reformers propose transitioning to funded accounts over time, optionally grandfathering current retirees.
Reform shifts the structure from intergenerational transfer to self-funded savings, improving long-term solvency and fairness.
7. Localized Equity Support Through Public Custody Models
Inspired by Sweden’s PPM system, custodial platforms can be public, ensuring fee transparency, fraud protection, and mandated passive allocations.
In the U.S., excess capital gains or fund growth could be redirected toward targeted supports (e.g., low-income workers, disabled populations, disaster relief) without sacrificing long-term solvency.
Comparing Private Investments versus Social Security
Item
Social Security
Private Account
Risk
Guaranteed by Full Faith of US Government and the unlimited ability to Tax.
Exposed to Market, can gain and lose principle, much more volatile.
Guarantees
Fully Guaranteed, but dependent on Government Formula which can change.
No guarantees, based on Market returns. Can lose principle.
Performance
Not invested, based on Social Security formula to contribute. Very Low effective equivalent return.
Equity Market based returns outpace other investments. Much higher historical returns for long term investments.
Equity
You own nothing, at death you can not transfer assets.
Assets are owned by individual, can be transferred to beneficiaries.
Asset or Liability
Liability – Social Security is an expense that each year must be paid from current Taxes to Beneficiaries.
Asset – The Government would have no liability, and the value would become an Asset to the Beneficiary.
Unfunded Liability
As a Liability, shortfalls in revenues versus future payouts become unfunded liabilities
No Liabilities
Generational Wealth
Not an asset, so wealth can not be passed on.
Assets can be passed on, increasing Generational Wealth.
Social Safety Net
Provides Lower Income, and Disabled Citizens a Social Safety Net to provide some income, and potentially higher than their contributions.
Does not natively provide Social Safety Net. May help some at risk with higher incomes, but does not address Low Income or Disability. Programs could be setup to address.
Administration and Regulation
Centrally administered by Government, highly Regulated by Congress
To be determined, but likely a combination of Government regulation and administration in conjunction with Private Enterprises to administer program and set guidelines on acceptable plans to reduce risks.
Fraud & Abuse
Overall low, but significant amounts. From 2015-2022 improper payments of $72 billion. [13]
To be determined, but investment fraud, and abuse happen in our current financial system and this will be no different.
Retirement Age
As a Pay As You Go system, Social Security requires more workers to pay for beneficiaries, putting pressure to keep Retirement ages high especially as the retirees makeup larger portions of population.
Likely a Privatized system would have requirements. However, retirement is NOT about age, it is a about wealth. If you have achieved your asset growth, you could retire early, potentially much earlier than Social Security mandated dates.
Fixed Income
Social Security Provides a Fixed Income guarantee for the lifetime of the beneficiary. This means it can’t go down, but also that it doesn’t go up (there are periodic Cost of Living adjustments, but for the most part it is static).
Private accounts do not have Fixed Income guarantees. If you live longer, or have lost principle you are at higher risk. However, you can also have your principle and assets continue to grow, and have much higher assets and income to draw from.
Did the Trump Administration let the Cat out of the Bag?
While not a formal policy announcement from the Trump Administration, in remarks this past week, current US Treasury Secretary Scott Bessent discussed the idea of private retirement accounts as a solution to long-term fiscal imbalances.
“We’ve allowed Social Security to drift too far from its roots. The average American would be far better off with a real investment account – especially if they own it, can pass it on, and see it grow.” [10]
Treasury Secretary Bessent, a former Chief Investment Officer of Soros Fund Management, noted:
“Social Security could be partially privatized by giving younger workers the option to invest a portion of their payroll tax into low-cost index funds. Over 40 years, the compounding returns would generate far more wealth than the current system, which is essentially insolvent.” [6]
Bessent views private accounts not only as more financially sustainable but also as a path toward wealth-building for younger and disadvantaged Americans who are currently locked into our current Social Security System that is a low-yield, Pay-as-you-go system.
“In a way, it is a back door for privatizing Social Security,” “If, all of a sudden, these accounts grow and you have in the hundreds of thousands of dollars for your retirement, that’s a game changer, too.” [11]
While this topic has been passed around in policy discussions for a long time, privatization has always brought out fears, and opposition.
Conclusion: The Cat May Already Be Out of the Bag
Social Security reform is no longer an ideological debate—it is an actuarial necessity to keep the system solvent. The system’s financial path is unsustainable, and young Americans increasingly question whether they are paying into a program that will exist when they retire.
The Tax Project does not weigh into the debate, just presents facts and data, and hopes that Smarter more informed Citizens help make their choices. To some, the choice maybe obvious, for others the fear and risks of changes outweigh any gains. All have valid concerns and points. What is clear, is that the US Social Security program has structural challenges that won’t be resolved without some types of reform, and that delaying or ignoring the problem has not helped the challenge. There are working models out there, and we believe that Americans when presented with facts and data will always make the best choices. We will always bet on America’s Future.
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
