Moody’s Says U.S. Credit Rating At Risk

Moody’s, a credit rating agency, says the U.S. government’s triple-A credit rating is jeopardy due to soaring health care expenditures and Social Security. This shouldn’t be all that surprising. Think of a corporation whose expenditures are growing faster than its profits. Such a firm, generally, wont be around long. And that is precisely the problem with Medicare. It is growing at a clearly unsustainable rate, and as such the U.S. becomes more of a credit risk.

The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday.

The warning over the future of the triple-A rating — granted to US government debt since it was first assessed in 1917 — reflects growing concerns over the country’s ability to retain its financial and economic supremacy. […]

But Moody’s warning comes at a time when US confidence in its economic prowess has been challenged by the rising threat of a recession, a weak dollar and the credit crunch. […]

Unlike Moody’s previous assessment of US government debt in 2005, Thursday’s report specifically links rises in healthcare and social security spending to the credit rating.

“The combination of the medical programmes and social security is the most important threat to the triple-A rating over the long term,” it said.

Steven Hess, Moody’s lead analyst for the US, told the Financial Times that in order to protect the country’s top rating, future administrations would have to rein in healthcare and social security costs.

But we have McCain telling us he is going to cut Medicare premiums. Every Democratic candidate wants to actually spend more money. In the case of Senator Clinton; she proposed to fund her spending, in part, by rolling back the Bush tax cuts. Sounds good at first until you realize that the Bush tax cuts will expire on January 1, 2011 and that all of Senator Clinton’s spending will actually add to the budget deficit and exacerbate the situation.

FILED UNDER: Economics and Business, Government, Social Security, US Politics, , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. anjin-san says:

    So years of out of control spending by Bush,, does not rate a mention, but possible future spending by Hillary, who has won one primary does. Yes folks, when all else fails, blame a Clinton.

  2. Dave Schuler says:

    I saw this one, too, Steve, and thought it was a red herring. The commitment to GDP ratio of the U. S. is probably the best among the OECD countries.

    Still, there’s a kernel of truth there and, as anjin-san implies above we really should get our fiscal house in order. As I’ve noted before the scale of government (at all levels) spending is (from highest to lowest): education, Social Security, debt service, military, health care, with health care moving up fast. There’s an old principle of optimization: optimize where there’s something to optimize. Lots of us (me included) find pork-barrel spending irritating but it’s really small potatoes in the total scheme of things. If it were eliminated entirely it wouldn’t improve our balance sheet much.

    To console anjin-san I’d point out the provision in the Constitution that all spending bills start in the House of Representatives and, consequently, if you’re really interested in reducing spending the place to do it is the House, currently controlled by Democrats who haven’t shown any more inclination to trim spending than their Republican predecessors did.

  3. fredw says:

    Let’s talk about the 900 lb gorilla in the room, how are we paying fo the war in Iraq? As far as I can tell, we are putting those costs on our credit card, and the day will come when we raise taxes to cover it, or we default. Effectively this is a huge deferred tax hike, and our credit should be sub-prime until we formalize the tax hike and start paying the bill. Get real, no other “Wartime President” has ever lowered taxes to pay for a war. Busk is bankrupting us financially as well as morally.

  4. MichaelB says:

    The total cost of the war so far is less then one years worth of social security expenditure. The social security administration budget for 2008 is about $657 billion. That’s in the ballpark of $125 billion more then has been spent on the entire Iraq War, over 4 years.

    If you want to cut government expenditure, look to entitlements, that’s where the money is.

  5. anjin-san says:

    Ummm, about social security “expenditures”…

    I have been paying in to social security for decades. Have not, as yet, received a dime back. Do I think that I am “entitled” to have some of MY money back at some point? Yes I do.

    So I should have to give up my retirement money to pay for Bush’s moronic war? The GOP seems to think so.

    Oh yea guys, how are you liking the Bush inflation spike?

  6. MichaelB says:

    I’m not sure what your point is. You think you deserve Social Security and Medicare benefits? Fine. Doesn’t change the fact that the war in Iraq is really only a minor part of the federal budget, while social security and medicare obligations are what Moodys is worried about.

  7. Steve Verdon says:

    So years of out of control spending by Bush,, does not rate a mention, but possible future spending by Hillary, who has won one primary does. Yes folks, when all else fails, blame a Clinton.

    No, because by comparison it is a drop in the bucket. What did Bush’s tax cuts cost a couple trillion dollars in debt? Compared to 50 to 60 trillion, it doesn’t even rate.

    Dave,

    True, some place like France might have a worse debt to GDP ratio, but their impending health care woes aren’t nearly as big. Not sure it that equalizes things tho’.

  8. Paul says:

    Holy moly there are some reckless spenders around here. Yes, health care costs are a very serious problem, but that does not make the number “trillion” a small number. We’ll drop probably $1.5 trillion on Bush’s Iraq field trip. The Bush tax cuts, while not spending, will add $7 trillion to the debt. If you really think those “couple trillion” are so insignificant, I assume that means you’d have no problem if the government upped taxes by one or two of those “couple of trillion” on top of repealing the cut? I don’t think so. Pretty crazy that people whine about $50,000 earmarks and then brush off a “couple trillion.”

  9. anjin-san says:

    You think you deserve Social Security and Medicare benefits?

    Thinking I “deserve” social security “benefits” has nothing to do with it. It’s my money. I paid it in. One day, I want it back.

    I did not mention Medicare, that’s you putting works in my mouth.

  10. Hal says:

    It’s my money. I paid it in. One day, I want it back.

    The problem with the conservative mindset is that they really don’t understand this very simple point about SS. They actually think it’s a redistribution tax and that you don’t get back what you paid into it. It’s quite bizarre.

    Pretty crazy that people whine about $50,000 earmarks and then brush off a “couple trillion.”

    When it’s war, it’s no problem. A while back, some con had made the assertion that the fastest growing part of the budget was that for medicare,etc. Over the last decade, the fastest growing part of the budget has been defense – almost doubling in the decade

    Steve whines an awful, awful lot about medicare. I have yet to see him whine one bit about military spending.

    But that really isn’t a surprise, given his politics.

  11. M1EK says:

    The problem with the conservative mindset is that they really don’t understand this very simple point about SS. They actually think it’s a redistribution tax and that you don’t get back what you paid into it. It’s quite bizarre.

    Relatively few here would call me a conservative, but I’d call it as redistribution tax as well – considering that most past retirees took out many times what they ever put in (even assuming interest slightly above inflation), and even current retirees stand to do quite well.

    The fact that the tax applies to all wages short of 97,500 in 1997 makes this a tax on the young and poor which is paid to the elderly, regardless of their economic status. For most of them, they got “their money back” a long time ago.

  12. Hal says:

    M1EK, it seems that if people get more back than what they put into it, then it isn’t redistributing the money.

    I’m confused. Traditionally, in redistribution schemes, there’s a net loss to someone as the money they put in is distributed to those who have put in less. Please explain how this is happening in the case of SS.

  13. MichaelB says:

    It really isn’t your money. It’s the governments money. You can say it’s your money, but the law says it’s not. You paid social security taxes to the government. They promised to pay you social security benefits.

    Congress can pass a law that says they don’t have to pay you a dime, and that’s the end of your benefits. They can repeal the Social Security Act tomorrow, and that’s it. No more benefits paid to anyone. On the other hand, if some individual retirement accounts scheme were in place, it would actually be your money. But for now it’s not.

    Don’t take my word for it, read the Social Security Act. You’ll note that it never says anything about the money being “yours”.

  14. Hal says:

    You’ll note that it never says anything about the money being “yours”.

    Okay, so can you tell me when the government has failed to live up to this obligation? And this goes for M1EK, too. Basically, it appears that y’all are forgetting that we constantly borrow against the future and have since we invented the idea of finance thousands of years ago. We’re financing todays wars on the backs of tomorrow’s grandchildren. And I’m sure they’ll continue to do the same.

    This isn’t some bizarro world where things just popped into existence yesterday. We have over 50 years of experience with SS and I think you’re just insane if you think that the government is going to be able to reneg on those benefits. I’m paying for my parents benefits and my kids will pay for mine. Only someone purposefully misunderstanding the deal would claim that my money is being redistributed to my parents.

    So, sure. Get all Ron Paul and talk about the philosophy of “your money”. Let’s remember that the entire idea of economics is a complete and utter fiction in the first place and that society and culture as a whole are all just elaborate games played with rules that we simply made up out of nothing.

    It’s all simply an illusion anyway.

    Geebus.

  15. MichaelB says:

    Well, in 1983 they cut benefits. So I guess that’s the last time. I’d wager from reading the actuarial reports another round of cuts will come sometime in the next 20 years.

    And like I said, all it takes is an act of Congress to change the rules. The politics of the issue obviously govern how that works out – but that’s what constrains it, not some mythical “ownership” you have of the taxes you paid.

  16. Hal says:

    Okay, fair enough. But even with the 1983 changes, as M1EK will gladly agree with, people still get more money than they paid into the system. Part of this is the magic of interest and such, part of this is just required growth in the working population needed to deal with COLA.

    And sure, the President could suspend Habeas Corpus tomorrow and put us all under a military dictatorship. As I tried to make crystal clear, it’s all just a game played by arbitrary rules that we can change at will – something that the libertarians, I must point out, disagree with because they somehow think there’s some primordial property rights that predated human evolution or something. But other than that, pretty much anything can be wiped away with either the legislator’s pen, the judge’s gavel or the President’s police.

    Focussing on SS’s particular precariousness in this game o’ life seems oddly misplaced – especially given how other, far more fundamental aspects of our society such as rule o’ law, right to counsel, spying without warrants seem to being thrown under the bus. And given the worrying about SS vs. the blind eye we’re casting towards the trillions we’re throwing down the drain in Iraq (Iran 2008!!!!11!!!)…. well, it’s a bit odd to see and leaves one scratching one’s head wondering WTF is so important.

  17. MichaelB says:

    I’m a little surprised that you seem so agitated about this. All I said was that compared to social security and medicare, the cost of the war in Iraq was pretty small… and later that no one gains ownership of anything just by paying in to social security. It doesn’t even seem like you really disagree with either of those points.

    Then you come back at me with libertarian this and Iran that and what about the right to counsel. I’ll stipulate that all those things are important… but the post we’re all ostensibly commenting on here is about the credit rating of the US government. That’s what I’ve been talking about anyway.

  18. M1EK says:

    Hal, it’s a transfer from today’s low-wage earners to yesterday’s low-tax payers. The simple fact that the guy flipping your burger pays close to 8% while the retirees whose burger he’s flipping might have paid 2 or 3% on average ought to tell you something.

    It wasn’t inevitably going to be that way, but somebody slept at the actuarial wheel.

    Is there any evidence that today’s workers can expect a similar largesse from future retirees? Only if our population grows by an order of magnitude.

  19. Hal says:

    Is there any evidence that today’s workers can expect a similar largesse from future retirees?

    WTF? First, SS *currently* takes in far more than it pays out. For 2007, SS receipts were $869.6 billion, outlays were $586.1 billion. Even with the most pessimistic predictions, SS is only going to *start* falling short of what it is currently obligated to pay out somewhere around 2042. It’s important to remember that in1994 the doomsayers were predicting SS disaster in 2029. So, the time when we even start to think of a problem in SS keeps getting moved out. And even when it’s a “problem”, it’s actually pretty trivial to fix with some minor adjustments – clearly not a looming disaster of biblical proportions.

    If we had actually listened to Gore and created a SS “lockbox” rather than taking all that extra dough Greenspan decided we should rake in during the 80’s (’83 reform) and giving it away with Bush’s tax cuts and military spending, we wouldn’t even be talking about 2042 as a date as we’d have to project to infinity to find an issue with SS. Again, where’s the problem? I know the right has a huge incentive to talk this down and proclaim disaster, but I’m not sure what anyone else’s is. And the facts are pretty clear and even agreed upon by everyone in the debate – even the ones with a flashlight under their chin spinning scary stories of 2042 and the horrors that await us. There simply isn’t any problem with SS and even if you can squint and see one, it’s so far out – and keeps moving farther with each year – that it’s completely immaterial to any realistic argument.

    Or at least that’s the way it seems to shake out to my analysis. If you have some other way of looking at it, with different predictions that portend disaster, I’d love to hear about them…

  20. G.A.Phillips says:

    There simply isn’t any problem with SS and even if you can squint and see one, it’s so far out – and keeps moving farther with each year

    lol

  21. Hal says:

    Hey, I’m laughing, too, because mocking is pretty much you’re only recourse because otherwise you’d have to – you know – scrape up some actual support for your argument. Something clearly lacking in the right’s arguments in any of these discussions.

  22. M1EK says:

    Hal, I’m not a member of the right, and you’re making this a lot more complicated than it has to be.

    The reason today’s retirees were able to get such a great deal compared to what they put in is that when they started working, their tax rates were incredibly low, because it is and always was a pay-go system (and they were paying for relatively few retirees). They paid 1% at the start; moving up a few times during their working years; but, again, averaging something like 2-3%, and that applied only to the first N dollars of wages.

    The opposite is becoming true now. We’re paying for a LOT of retirees, and the guy flipping the burger pays 8% for the privilege.

  23. Hal says:

    Just asking for the analysis and statistics that back that assertion up. As the trusties’ report shows, we’re good until 2042. If you’re right, then where can I go to bone up so I won’t be mistaken in the future.

  24. M1EK says:

    Hal, I’m not making any argument about the solvency of the system. I’m just arguing with your complaint that it’s not an intergenerational wealth transfer. It is, now. It won’t be so much from here on out since the tax rates are now so high, but up until now it most definitely WAS.

  25. Hal says:

    Okay, I see your argument. I’m pretty sure that the rate of increase in the benefits has been only adjusted for inflation. You seem to be assuming that the rate we’re currently paying in is the rate we’re paying out, which if you look at the receipts vs. outlays clearly isn’t the case. The nominal reason was Reagan’s increase in 1983, on Greenspan’s advice, to build up a surplus to shore up SS. Unless they’re actually massively increased benefits since 1983, and unless the COLA have been way out of whack with actual inflation, it’s not obvious to me that it’s an actual wealth *transfer*. Sure, we’re paying more, but that’s going into a surplus for the system to pad when *we* retire (I’m a boomer, so I guess that means now). Seems to me I’ve been paying this extra since ’83 and consequently it’s theoretically still there – again, assuming there hasn’t been any massive transfer to the current and past retirees that you’re aware of that I am not.

    Is my argument sound or am I whacked? It seems like there should be some massive increase on the benefits side which I can’t seem to find which would be required for your wealth transfer assertion to be true.