Bangkok--13 Jul--Standard & Poor's
Standard & Poor's Ratings Services recently published an update to its aging report on the U.S. (AAA/Negative/A-1+). The new article, "Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now," updates the U.S. aging report it published last fall ("Global Aging 2010: In The U.S., Going Gray Will Cost A Lot More Green," published Oct. 25, 2010, on RatingsDirect on the Global Credit Portal), as part of a global study conducted to analyze the cost of aging.
The Global Aging 2010 study explored various scenarios--including a hypothetical base-case scenario that assumed no fiscal policy changes by the U.S. government--and described the implications we believed these scenarios could have on our sovereign ratings for some 49 countries over the next 40 years. We also published the methodology of our study, which details the simulation model, assumptions, and data sources we used (see "Global Aging 2010: An Irreversible Truth — Methodological And Data Supplement," published Oct. 7, 2010).
This update to the Global Aging 2010 report on the U.S. examines the impact on our long-term projections of last December's Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (December tax agreement), that postponed the expiry of several stimulative fiscal measures (tax cuts and unemployment benefits extensions, for example) until the end of 2012. The simulation model we used in the update assumes government revenue and non-age-related expenditure, excluding interest on government debt, remains fixed at the 2012 level, as a share of GDP, throughout the projection period. Our updated hypothetical Base Case Scenario (no fiscal policy change) projections thus amount to examining the long-term fiscal implications of making the 2001 and 2003 tax cuts, along with all other measures incorporated in the December tax agreement, permanent.
"In our view, the December tax agreement is likely helping to sustain economic recovery, but our updated simulation results show noticeably higher projected future U.S. government indebtedness in all our scenarios, including our higher-growth scenario (involving 1% of GDP higher real economic growth in each year of the next four decades), primarily as a result of that agreement," said Standard & Poor's sovereign credit analyst Nikola Swann. "In our hypothetical Base Case Scenario, our simulation projects U.S. net general (total) government debt at almost 600% of GDP in 2050, compared with slightly more than 400% in our study of last fall," Mr. Swann said.
"Our updated findings imply a mild deterioration in our hypothetical rating results, compared with those of last fall," Mr. Swann noted. "Our updated base case scenario results imply our sovereign rating on the U.S. falling from 'AAA' to the 'A' category by 2020 (as in last fall's study), to the 'BBB' category by 2025 (also unchanged), and 'BB' or lower (speculative grade) by 2030; the fall to speculative grade is five years sooner than in our study of last fall," Mr. Swann said.
"We emphasize that we do not expect these simulated, hypothetical rating results to happen. Rather, we expect that U.S. policymakers will, sooner or later, make the policy changes needed to avoid such outcomes. Nevertheless, one contributing factor in our recent negative outlook decision (see "United States of America 'AAA/A-1+' Rating Affirmed; Outlook Revised To Negative," published April 18, 2011) is our view that there has, as yet, been no significant progress in addressing these long-term cost drivers, nor any consensus developing among the Obama Administration, the Senate, and the House of Representatives regarding the specifics of a comprehensive plan to address the long-term challenges," Mr. Swann said. As the issues involved affect all U.S. citizens (among whom there also appears to be disagreement), we believe that negotiations on meaningful fiscal consolidation will likely take time and could result in only piecemeal measures. Current political discourse, in our view, makes even this seem unlikely to happen before the 2012 presidential and congressional elections.
"Our 2011 study results illustrate the future, long-term rating impact that the age-related cost drivers we identified could have, by themselves, if the December tax agreement were extended indefinitely and the government doesn't eventually take substantial and sustained ameliorative policy action," Mr. Swann said.
The report is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to
[email protected]. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contacts:
Jeff Sexton, New York (1) 212.438.3448,
[email protected]
David Wargin, Washington, DC (1) 202.383.2298,
[email protected]
Analyst Contacts:
Nikola G Swann, CFA, FRM, Toronto (1) 416-507-2582
Marko Mrsnik, Madrid +34 913 896 953
John Chambers, CFA, New York (1) 212-438-7344
David T Beers, London (44) 20-7176-7101