Amid the discussions of the debt, we sometimes forget that the retirement of the Baby Boomers complicates things in part because it means that the "trust funds" will start selling, rather than buying T-bills, John Steele Gordon notes:
By far the biggest holder of federal treasury bonds is the United States Government itself ($4.2 trillion worth, as compared to $2.7 trillion held by foreigners). Most of this debt is owned by various trust funds, principally the Social Security Trust Fund. That makes the total national debt $10.5 trillion, not $6.3 trillion, 73 percent of GDP, not 40 percent.
The big problem here is that many of these trust funds will have to start dipping into their stockpiles of treasuries in order to pay their obligations in the near future. Medicare is already doing so. Social Security will begin in 2016 according to current projections, as the tide of retiring baby boomers swells.
When the trust funds need the money, they will take their treasury bonds to the Treasury and ask for it. The government will then have three means for raising the money: 1) It can make cuts in spending in other areas of the federal budget (but not to the ever-growing portion that will have to be allocated to interest on the debt, a constitutional obligation). 2) It can raise taxes substantially to bring in new revenue. Or 3) It can go into the bond market and sell still more bonds over and above the trillions of dollars’ worth it will be selling in order to finance the Obama deficits.