The U.S. will witness a significant demographic shift over the next two decades, posing economic, fiscal, and social challenges for U.S state governments, S&P Global Ratings said in a report.
The U.S. Census Bureau expects that the number of people aged 65 and above will exceed those under the age of 18 by 2035 for the first time ever.
"S&P Global Ratings considers generational dependency a long-term social credit factor that may result in state credit deterioration," according to the report.
The "old-age dependency ratio," or the number of people aged 65 and above divided by the total labor force, of all states in the U.S. will increase, the rating agency said. In fact, the number of states with a ratio exceeding one-third is expected to reach 37 by 2040 from just three expected by 2020.
As the population ages, and people leave the workforce, younger generations are expected to help fund government services and economic growth.
Medical costs are likely to weigh on state budgets in the Northeast as aged Medicaid enrollment grows, S&P Global Ratings wrote.
In the South, a spike in working-age adults has offset a rise in retirees, slowing the region's generational dependency growth. Nevertheless, economic diversification will be essential in ensuring the South's credit stability.
S&P Global Ratings projects every state in the Midwest apart from North Dakota to have an old-age dependency ratio of more than one-third within the next two decades as young people move out of rural areas, leaving an older generation behind. "We expect significant out-migration and aging-in-place to limit the Midwest's economic growth and to pressure state spending," S&P Global Ratings said.
Meanwhile, aging-in-place will worsen housing affordability challenges in the West.