WASHINGTON -- Absent policy and legislative changes, mandatory social spending will pressure the U.S. government's fiscal profile and credit standing toward the end of the decade, Moody's Investors Service said in a report released Wednesday.
Currently, the U.S. government's fiscal position is relatively healthy. The rating agency said it expects that for the next few years, deficits will stay in line with historical averages and debt ratios will be stable.
However, the Congressional Budget Office is predicting that deficits, as a percentage of gross domestic product, will increase at the end of the decade due to fiscal pressures from mandatory spending programs, and that debt levels will also rise. The federal government debt-to-gross domestic product ratio is estimated to increase to 88% by 2030 from 75% currently, Moody's said.
Total spending on Social Security and major health care programs increased to 9.8% of GDP this year from 7.1% of GDP in 2000. The bulk of the increase in mandatory spending has occurred because of the country's aging population, rising health care costs, and broadening eligibility for participation in government programs. These factors will continue to be the main drivers of social spending in the future, Moody's said.
The U.S. could have additional revenue to support greater social spending if the country's economic growth rate ends up higher than expected, the rating agency said. This could happen if the net immigration rate is greater than anticipated. Also, faster job and real wage growth could help lead to increased revenues available to be spent on social programs. But Moody's believes potential economic growth will be lower in the next several years than prior to the financial crisis because of demographic trends and other factors.
"A number of plausible policy options are available to help stabilize debt and deficit measures," Moody's senior vice president Steven Hess said in the report.
The paper cites three major actions the federal government could take related to social spending that, together, could lead to a reduction in projected debt levels. The first would be to expand the Social Security tax base, increase the contribution rate to the program and lower the level of old-age benefits . The second would be to increase Medicare premiums, co-payments and state contributions. The third would be to reduce the breadth and debt of health-care insurance subsidies.
Moody's gives the United States a triple-A rating. Of the countries with that rating, the U.S has one of the highest ratios of general government debt to GDP.
The rating agency said it is unlikely that the U.S. fiscal position will improve significantly relative to its peers in the medium term. In the longer run, fiscal pressures from retirement and health care spending are likely to be greater for other highly rated countries than the U.S., but the federal government's position will still decline on an absolute basis.
