While global warming is still a potential threat to a country’s creditworthiness, the impact aging populations will have on sovereign debt and public finances poses a bigger threat to the developed world, including the United States, according to the leading global ratings agency.
Standard and Poor’s says that global warming and global aging are the two “mega-trends” that dominate the discussion about global economic challenges. But there is still a lot of uncertainty surrounding the impacts global warming will have on individual countries, while the impacts of growing pension, healthcare and welfare costs are widely understood and relatively clear.
“Our conclusion is that over a multi-decade time horizon the financial consequences of aging societies are likely to overshadow all other economic trends for most sovereigns,” S&P said. “We also expect advanced economies will be more negatively affected than sovereigns in emerging markets.”
Rich countries, like the U.S. and many European nations, have saddled themselves with trillions of dollars of unfunded liabilities and debt. A study by University of California-San Diego economist James Hamilton found that the U.S. reported debt of $16.7 trillion is just the tip of the iceberg because of its $70 trillion in off-the-books debt at the end of 2012.
“The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds,” Hamilton wrote. “The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt.”
The biggest contributors to the U.S.’s off-the-books debt were entitlement programs: Social Security and Medicare. Both of these programs are meant to assist retired people with living and medical expenses, but both are presented with the problem that the U.S. population is aging and there won’t be enough working people to support them.
Hamilton reports that the Social Security program has $26.5 trillion in unfunded liabilities and Medicare has $27.6 trillion unfunded liabilities. Some European nations and Japan are already feeling the strains of aging populations on their public welfare programs and fiscal planning.
“The impact of aging societies is already being felt in several advanced economies, most notably Japan, and will steadily increase through the next few decades,” S&P notes. “For most sovereigns, their demographic profile is such that the full impact of aging on economic performance and public finances will be felt from the mid-2020s or soon after (note: this is well beyond the time-horizon that can be reasonably applied to a sovereign credit rating).”