Sovereigns worldwide appear to be making steady progress in containing age-related spending. Since March 2013, when we published our last update on the implications of population aging on sovereign credit ratings, many sovereigns have implemented further structural changes to their social safety nets. Coupled with simultaneous budgetary improvements since the onset of the economic and financial crisis in 2008/2009, our latest analysis of 58 sovereigns from across the world suggests that, if maintained, these reforms should gradually contribute to improved prospects for long-term fiscal sustainability.
Complicating these efforts, however, is the relatively fragile economic recovery of advanced sovereigns, especially in Europe. On the one hand, sovereigns need to curb public spending on pensions and health care to contain the financial risks posed by the coming wave of seniors. On the other, they need to sustain adequate pension benefit levels to prevent an increase in poverty risk for retirees. Otherwise, substantial rises in health care and long-term care costs, together with eroding purchasing power of pension benefits could widen income inequality, which, in turn, risks impairing long-term economic growth prospects.
- We believe structural changes that many sovereigns have implemented in recent years to contain age-related spending, particularly to stabilize future pension costs, will help sustain long-term public finances, if kept in place.
- Sovereigns nevertheless face a difficult balancing act between curbing public spending and ensuring the adequacy of benefits to prevent otherwise growing risks of poverty and inequality, in our view.
- We think further policy actions will likely be necessary, particularly to curb the rising costs of health and long-term care. In this context, we observe that rationalizing social security systems can, if embraced early on, spread the impact and the burden of unpopular policy measures.
- Our analysis suggests that the need to alter demographically driven budget trajectories is as pressing for some emerging market sovereigns as it is for sovereigns with advanced economies. In the absence of policy action, the median net general government debt in advanced economies will rise by 2050 to 131% of GDP, and for emerging markets sovereigns to 136%.
- According to our simulation of hypothetical long-term sovereign ratings and credit metrics in a no-policy-change scenario, by 2050 more than a quarter of the 58 sovereigns we've analyzed would have credit metrics that we currently associate with speculative-grade sovereign credit ratings.