Cato Scholar Comments on Moody's U.S. Bond Rating Warning

Friday, January 11, 2008

Jagadeesh Gokhale, senior fellow:

Economists of all political hues have long been cautioning policymakers that the U.S. government's entitlement programs are excessively profligate. Their spending commitments are so starkly out of line with available resources that they threaten to unravel the U.S. economy. Despite near unanimity among budget analysts about the urgent need for restructuring entitlement programs, lawmakers in Congress remain deadlocked on the best course of action.

Now Moody's has issued a warning that the United States risks losing its triple-A rating unless corrective fiscal policies are implemented within a decade. Unfortunately Moody's warning comes late and is badly worded. Indeed, it may suggest to policymakers that they need not worry about introducing entitlement reforms for another decade!

Moody's warning appears to be based on when U.S. federal budget deficits would begin to spiral upward—when baby boomers begin to retire and collect Social Security and Medicare benefits in droves. It fails to consider that the costs of undertaking corrective action are spiraling out of control right now.

How? Consider that the Social Security and Medicare Administrations have estimated those programs' total financial imbalances at a staggering $90 trillion. Interest on that implicit debt at the government's interest rate of 3 percent implies currently accruing costs of $2.7 trillion per year—more than 10 times larger than today's federal budget deficits.

That means, by waiting for a decade we would forgo an opportunity to save more than $30 trillion—and adjustments to entitlement programs thereafter would have to be larger and more draconian. Our budget problems are not getting easier to resolve, they are getting harder—today—something that Moody's warning ignores.

Rather than sounding trite warnings on the basis of future deficits and prospective policies, Moody's should base its ratings of government debt on the government's fiscal imbalance. It should also avoid suggesting that we can wait for a long time before we must swallow the bitter pill of entitlement reforms.

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