The New Math of Affordability

The road to financial security has become more complex. From housing and education to credit and retirement, it seems everything has become more expensive. Today’s challenges come from more than rising prices. It’s also about how the financial system works and how government policies can change what it takes to get ahead.

Few individuals understand the issues as well as Sheila Bair, whose exceptional career gives her a multifaceted perspective on the affordability debate.

Listen to our interview with Sheila to hear her deep, firsthand insight on the forces behind today’s affordability pressures—and where meaningful solutions may lie.

Key Takeaways

Edited excerpts from our conversation with the Honorable Sheila Bair.

Q: Is there anything fundamentally different about the affordability challenges we’re facing today?

We’ve experienced worse bouts of inflation in the past, but this episode has been particularly difficult because the largest price increases have occurred in essential areas like education, housing and health care—areas where government subsidies play a significant role.

I think there’s a connection there. When government steps in with the best of intentions—to help people and make things more affordable—it can make things more expensive. This occurs because it relies on demand‑side stimulus. But when supply can’t keep up, increasing demand simply pushes prices higher.

The government also doesn’t always align economic incentives properly, especially for intermediaries delivering the services. For instance, with housing, mortgage lenders have an important function and tend to dominate debates about housing policy. As a result, when we talk about promoting homeownership, the focus is often on expanding mortgage finance rather than addressing the supply of housing itself.

That demand‑side emphasis—making it easier to borrow rather than increasing supply—is a key part of the problem we’re seeing today.

Q: Why won’t lower mortgage rates solve the housing affordability problem today?

I think it’s a prime example of confusing housing affordability with mortgage affordability. They are not the same. … I fear that ratcheting down mortgage rates again will worsen housing inflation because it increases demand. What someone saves in a lower mortgage payment, they lose to a higher home price.

Q: How should policymakers approach the problem of college debt?

We need to be realistic. I want everybody to fulfill their dreams, but taxpayers shouldn’t be expected to fund those dreams by absorbing hundreds of thousands of dollars in student debt. Most taxpayers have not attended college themselves, and asking them to shoulder that burden doesn’t strike me as fair.

That’s why the recent reforms are important. The new legislation significantly simplifies the student loan system by introducing some common‑sense limits on how much students can borrow, eliminating negative amortization and streamlining repayment plans. Borrowers now essentially have two clear repayment choices. The system was unmanageable before, and these changes are very positive policy accomplishments.

Q: Would a 10% cap on credit card interest rates help address affordability?

There’s no chance a 10% cap will happen. Even if the proposal was temporary, a flat cap at that level is likely too low. I think very marginal borrowers would simply lose access to credit cards altogether. Despite its drawbacks, a credit card is still basic to functioning in today’s economy, and even economically distressed households need access to that tool. At a 10% rate, many wouldn’t qualify.

A better approach would be regulating the spread rather than imposing a hard cap. Prior to the financial crisis, the spread between the federal funds rate—banks’ own borrowing costs—and credit card rates averaged about 10 percentage points. That kind of framework could serve as a more practical and balanced guidepost.

Q: Could private credit trigger the next financial crisis?

At this point, I don’t see private credit as a systemic risk. Treasury recently estimated banks’ exposure to private credit at roughly $300 billion, which, in the broader context of the financial system, is not especially large. During the subprime era, mortgage losses ran into the hundreds of billions. If that had been the full extent of the problem, the system likely could have absorbed it.

What made the subprime crisis so damaging was all the derivatives piled on top of the mortgages. Those highly leveraged structures meant that even modest mortgage losses could translate into enormous losses in the derivatives markets.

We don’t have that kind of financial engineering tied to private credit today, which is why I don’t expect it to become a systemic crisis. However, there could be more stress in parts of the market. I think software companies could be in for a rude awakening. We’ll have to see how it plays out.

Q: Are Social Security benefits at risk of being cut?

Yes—if Congress continues to do nothing, there will be a significant cut in Social Security benefits. Full stop. It’s not an opinion; it’s just math. The system does not have the funds to pay full benefits indefinitely without changes.

Most people assume Congress will act before that happens, and historically they usually do—especially if they want to keep their jobs. I worked for Senator Bob Dole in 1983, when Congress reached a major Social Security compromise. At the time, lawmakers knowingly built up large reserves because they understood the baby boomer generation would eventually retire and place greater demands on the system. The assumption was that when that moment arrived, Congress would return and pass another reform package to keep the system sustainable.

That moment is now, and Congress has not acted. We’ve known for decades this was coming.

Q: What makes fixing Social Security harder now—and what options remain?

If we had taken care of this 30 years ago—raising revenues, cutting expenses or both to build up the reserves—then we would have had the power of compounding working in our favor. Now, we don’t have any time at all. Even if Congress acts now by cutting benefits or raising revenues, we have only a few years to accumulate compound returns before the trust fund starts falling short.

It’s really legislative malpractice that’s gotten us to this point. There are still ways to close the gap, but it will be painful. As we saw in 1983, the solution will almost certainly involve a combination of revenue increases and benefit cuts. And I expect benefit cuts to hit people like me.

One proposal under discussion would cap household Social Security benefits at $100,000. That would affect relatively few people now, but with inflation adjustments over time, more households could eventually be subject to the cap. That approach could save a meaningful amount and effectively expand the tax base.

A proposal I strongly oppose is raising payroll tax rates. Social Security payroll taxes are already extremely regressive, and that became especially clear to me while writing a book for teens about personal finance and the realities of payroll taxes. Increasing those rates would disproportionately burden workers who can least afford it.

Q: Why is the current tax structure becoming less sustainable as the economy changes?

The shift of income away from labor and toward capital has become very pronounced. At the same time, the labor force is shrinking due to demographic trends and the impact of AI. As a result, the wage‑earning, payroll tax base is declining relative to investment income.

If the tax system doesn’t begin capturing more of that investment income, it becomes unsustainable. Whether through income taxes or Social Security–related payroll taxes, I think we will need to capture more investment income in the tax base. That could take different forms.

Q: What has inspired you to channel your energy into promoting financial literacy, especially for young people, right now?

I don’t want people to lose money in the financial system. I want the system to work for them, not against them. That means people need to protect themselves—by being alert, asking questions and understanding the risks they’re taking.

The money people save by avoiding basic financial mistakes can make a real difference, especially when it comes to affordability. With today’s cost of living, you can’t afford to lose a penny unnecessarily.

That’s my crusade these days: helping young people avoid mistakes that can set them back just as they are getting started.