S&P Warns on Cost of Aging Population

Government debts will surge in coming decades if action isn't taken quickly to cut the cost of paying pensions and providing health care to aging populations, Standard & Poor's (S&P) Ratings Services says.

If governments don't cut age-related spending the size of the state relative to the economy will jump and credit ratings will fall, with developed economies suffering the largest downgrades.

S&P says people aged 65 and over will account for 16.2 per cent of the world's population by 2050, up from 7.6 per cent now.

If current pension and other programs aren't scaled down, S&P estimates that costs related to aging populations will push government debt up to 260 per cent of gross domestic product (GDP) by 2050 from 50 per cent of GDP in 2020 and 36.1 per cent of GDP now.

However, many European nations that have generous state pension systems and will have older populations would be in a much worse position.

S&P estimates that in the United Kingdom, government debt will rise to over 430 per cent of GDP by 2050, while German government debt will rise to more than 400 per cent, French government debt to more than 403 per cent of GDP, Italian government debt to over 245 per cent of GDP and Spanish government debt to over 544 per cent of GDP.

In the United States, government debt will rise to 415 per cent of GDP, while Japan's government debt will rise to 753.1 per cent of GDP, by far the highest figure for the 49 economies covered by S&P's report.

The sharp rise in government debts as a result of the financial crisis and the recession that followed have made action more urgent, S&P says.

S&P said governments have a number of options. They can try to improve the employment rate for older workers, cut spending on other items, or cut spending on pensions and health care.

Source: Paul Hannon, S&P Warns on Cost of Aging Population, Wall Street Journal, October 7, 2010.

For text: http://online.wsj.com/article/SB40001424052748704696304575537893781930572.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 19 October 2010