Global Aging 2011: In The U.S.,Going Gray Will Likely Cost EvenMore Green, Now
Primary Credit Analyst:
Nikola G Swann, CFA, FRM, Toronto (1) 416-507-2582; nikola_swann@standardandpoors.com
Secondary Contacts:
Marko Mrsnik, Madrid +34 913 896 953; marko_mrsnik@standardandpoors.comJohn Chambers, CFA, New York (1) 212-438-7344; john_chambers@standardandpoors.comDavid T Beers, London (44) 20-7176-7101; david_beers@standardandpoors.com
Table Of Contents
Looming U.S. Fiscal Bill Is Growing As The Population Gets OlderUpdate Of Global Aging 2010 Study For The U.S.Health Care Costs Will Dominate Age-Related SpendingIn The Long Term, Policy Responses Will Be Key To The U.S. 'AAA'Rating
June 21, 2011
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Global Aging 2011: In The U.S., Going GrayWill Likely Cost Even More Green, Now
As the baby boomers start to reach retirement age, the percentage of the U.S. (AAA/Negative/A-1+) populationeligible for government support will begin to mount. Babies born in 1946 turn 65 this year and will become eligiblefor Medicare. They will also be entitled to start collecting full Social Security retirement benefits next year, under thecurrent system. The U.S. government, however, is not currently collecting enough money to pay its Medicare, SocialSecurity, and other long-term bills.The issue isn't unique to the U.S.—virtually all the major industrial societies will have to deal with it sooner or later(see "Global Aging 2010: An Irreversible Truth," published Oct. 7, 2010, on RatingsDirect on the Global CreditPortal). This update of our Global Aging 2010 study, part of a global study conducted to analyze the potential costof aging, reflects the effect of the tax agreement reached in December 2010 (December tax agreement) as part of theTax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Act). The December taxagreement extended the 2001 and 2003 tax cuts to the end of calendar 2012 and extended certain otherexpansionary fiscal policies such as enhanced unemployment benefits for long-term unemployed workers.In our view, the challenges facing the U.S. are more severe than those facing many of the other major industrialsocieties considered in our Aging Study because of its rapidly escalating health care costs. However, the U.S.' old-agedependency ratio (the number of people 65 and older divided by the number of those 15 to 64) suggests that it mayhave more flexibility to address the aging problem than most European countries and Japan.So far, though, the U.S. political system has not made material progress toward alleviating the rising cost of payingage-related benefits in our estimation. And recent dynamics in Washington suggest to us that agreeing on policychanges to deal with such costs may take some time.
Looming U.S. Fiscal Bill Is Growing As The Population Gets Older
The cost burden of an aging population is set to become much larger in the absence of policy adjustments. Asdescribed below, our hypothetical Base Case Scenario (involving no fiscal policy change) in our update to ourGlobal Aging 2010 study for the U.S. suggests that, under current policies (i.e., tax rates and entitlement programs),U.S. net general (total) government debt would reach almost 600% of GDP by 2050, up from 75% this year. This isa hypothetical result, the product of a simulation based on unchanged policy—not a forecast (see "Global Aging2010: An Irreversible Truth – Methodological And Data Supplement," published Oct. 7, 2010). Nevertheless, webelieve these results are suggestive of what likely lies ahead in the absence of any fiscal policy changes.Four years ago, our hypothetical analysis projected that, under a similar absence of any fiscal policy adjustments, theU.S. 2050 net general government debt would likely be significantly lower at about 240% of GDP. The increasebetween that projection and our projection in our Global Aging 2010 study was primarily a result of the 2009stimulus package and the recession's shrinking of government revenue.In our Global Aging 2010 study, our hypothetical analysis projected, again absent fiscal policy adjustments, that2050 net general government debt would likely also be significantly lower, at a little more than 400% of GDP. Theincrease since that projection is primarily due to the effect on the general government budgetary trajectory of the
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December tax agreement. While the December tax agreement may be helping to sustain the economic recovery, it isalso helping sustain high general government budget deficits, which we expect will remain more than 10% of GDPthis year.
Update Of Global Aging 2010 Study For The U.S.
For all 49 sovereigns analyzed in our Global Aging 2010 study, we assumed "fiscal autopilot" for revenue andnon-age-related expenditure from 2012, freezing the general government primary balance (general governmentbalance with expenditure excluding interest costs) at the 2012 level for the remaining 38 years of our projectionperiod. In the case of the U.S., given the currently scheduled expiry at end-2012 of the 2001 and 2003 tax cuts, ournew hypothetical projections in our hypothetical Base Case Scenario, calculated as part of this update, illustrate thepossible long-term fiscal implications of making the 2001 and 2003 tax cuts permanent along with all othermeasures covered by the December tax agreement.Alternatively, allowing the December tax agreement to expire as currently scheduled significantly improves theprojections. An illustration of the potential consequences of expiration for the U.S.'s fiscal consolidation efforts issuggested by the results of our hypothetical Scenario 2 (Balanced Budget in 2016) simulation, which presume notonly expiry of the December tax agreement but also further fiscal consolidation measures, eliminating the generalgovernment deficit (entirely, that is, achieving general government balance), by 2016. Scenario 2 presumes the U.S.government will revert to "fiscal autopilot" after 2016, taking no further action except to borrow to pay forincremental age-related (and interest) expenditures as they occur. Despite this absence of policy effort beyond 2016(and with the same forecast long-term increase in age-related expenditure), under Scenario 2 net general governmentdebt would hypothetically rise to only 150% of GDP by 2050. A comparison of Scenario 2 (Balanced Budget in2016) to our hypothetical Base Case Scenario suggests the long-term value of medium-term fiscal consolidation.On the other hand, our new hypothetical Scenario 6 (Higher growth) results suggest that even structurally highergrowth, maintained during the next four decades (real GDP growth is assumed 1% higher throughout the projectionperiod), would not make nearly as much difference as would medium-term fiscal consolidation. In Scenario 6, netgeneral government debt still hypothetically rises to more than 500% of GDP by 2050.The U.S. is actually in a better position than some other industrial countries when it comes to demographics, thanksto a somewhat higher birth rate and a much higher immigration rate. In 2010, there were 26 retirees for every 100members of the U.S. labor force. By 2050, however, we expect that there will be 50 retirees per 100 workers. Inother words, the U.S. will go from four workers to support every retiree to only two. This is still better than theOECD (Organisation for Economic Cooperation and Development) average, which we expect will increase from 31retirees to 62 retirees per 100 workers during the same period. The increase in the proportion of retirees is a majorreason for the challenges we expect the U.S.—and all other industrial countries—to face down the road. The oldestnations (Italy and Japan) will have only one worker per retiree by 2050.For the U.S. to address these issues in the absence of major advances in the economic efficiency of health careprovision, we believe the government faces a choice of either raising taxes sharply or cutting age-relatedspending—primarily on health care—equally sharply. In our view, neither outcome, nor even a compromise betweenthe two, seems imminent given current political discourse.
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Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now
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