Aging populations are taking a toll on public finances around the world, with ratings agencies warning that recent interest rate hikes are increasing the impact of rising pension and health care costs.
Moody’s, S&P and Fitch all warn that demographic deterioration is already hurting government credit ratings as interest rates soar following the biggest inflation spike of a generation.
He added that without drastic reforms, a downgrade was likely, creating a vicious cycle of increasing fiscal burdens and rising borrowing costs.
“Demographics used to be a medium- to long-term consideration,” said Dietmar Hornung, associate managing director at Moody’s Investors Services. “The future is with us now and is already impacting sovereign credit profiles.”
The US Federal Reserve, the European Central Bank and the Bank of England all raised interest rates to their highest level since the financial crisis this month, increasing the cost of servicing government debt.
“While demographics are slowing, the problem is becoming more urgent,” said Edward Parker, global head of sovereign and supranational research at Fitch, which downgraded France’s credit rating last month. Emmanuel Macron He warned that the president’s reform path could come to a standstill.
“In many countries, the negative impact is deepening, and the negative impact is only increasing,” Parker added.
Ratings agencies say rising borrowing costs are exacerbating both the growth impact of a changing working-age population and the fiscal hit of rising health care and pension burdens.
This is having an impact on the EU’s debt outlook, where the share of the population aged 65 and over will rise from 20% today to 30% by 2050, according to the European Commission, as will Japan and the US. is.
Marco Mursnik, chief sovereign analyst at S&P Global Ratings, said the S&P stress test showed that a 1 percentage point increase in borrowing costs would push debt-to-GDP ratios for Japan, Italy, the United Kingdom, and the United States to around 1.5%. A 40-fold increase, he added. -60 percentage points by 2060.
“This is a very large increase and suggests that reforms to address aging pressures or other fiscal reforms will likely be needed to make government debt sustainable,” he said. ‘ said.
The S&P said in January that about half of the world’s largest economies would be downgraded to junk by 2060, up from about a third today, if no action is taken to mitigate the costs of an aging population. .
The report estimated that without reforms in fiscal policy related to population aging, the general government budget deficit would rise to 9.1% of GDP by 2060, up from 2.4% in 2025.
S&P also expects pension costs to rise by an average of 4.5 percentage points of GDP to reach 9.5% of GDP by 2060, although there is wide variation across countries. The rating agency projected that between 2022 and 2060, healthcare spending in the median country will increase by 2.7 percentage points of GDP.
“The longer governments delay action, the more painful that action will be,” Fitch’s Parker said.
In a sign of pressure, Republicans in Congress are calling for spending cuts and structural budget reforms amid bitter rivalries over the US debt ceiling.
Analysts point to Germany, which has one of the worst demographic trends in Central and Southern Europe in the world, with the world’s fastest aging population.
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In this year’s Moody’s report, tensions in the German labor market were “already visible”, adding that “without reforms, potential growth will weaken further next year.”
Rating agencies have also warned of structural deficits in Spain’s pension system, where the government has recently re-established a direct link between payments and inflation, and France’s financial management performance.
But they credit Greece for making sweeping reforms to its pension system after the debt crisis. In an S&P study of 81 countries, it was the only state where age-related spending is expected to decline by 2060.
In contrast, demographic pressures have weakened the outlook for several Asian countries. “Looking to 2050, South Korea, Taiwan and China will be some of the countries with the worst profiles,” Parker said.
Additional report by Bernie Jopson in Madrid
