Wednesday, October 29, 2014

You Can Stop Worrying About The National Debt. Moody Says U.S. Finances "Healthy"

So it's official: No one is worried about the U.S. debt anymore. Not even Moody's, one of the nation's top ratings agencies.
In a report issued Wednesday, Moody's declared the government's finances "relatively healthy, having surpassed our prior expectations" for reducing the scary annual budget deficits that drove the debt to nearly $18 trillion and the highest level as a share of the economy since the end of World War II. After four years of deficits in excess of $1 trillion, last year's budget gap was a relatively manageable $483 billion, or 2.8 percent of the size of the economy.
"The overall message is, Number 1, we're confident in the credit-worthiness of the U.S. government for the next couple years," said Moody's Senior Vice President Steven Hess.
But -- and you knew this was coming -- there are dark clouds on the horizon. By 2018, the ratings agency expects annual deficits once again to surpass 3 percent of the size of the economy and to keep getting bigger. By 2030, debt held by outside investors is on track to rise from the current 75 percent of the size of the economy to 88 percent, an alarming increase that "likely would bring negative pressure" on the nation's sterling AAA credit rating.
The source of this additional debt? ""The rising cost of healthcare services and demand for those services due to the aging of the population," which will slowly drive spending on Medicare and Social Security through the roof.
Fortunately, Washington has plenty of options for righting its future finances. Unfortunately, all of them are what the report delicately calls "politically sensitive."
For example, policymakers could increase immigration rates, importing more workers to shore up the finances of the federal health and retirement programs and cover the cost of Baby Boom retirement benefits. They could also raise revenue, for example, by lifting the cap on Social Security taxes, which are currently paid only on annual income under $117,700. Or they could raise the Social Security tax rate, which currently stands at 12.9 percent, evenly divided between workers and their employers.
Or they could cut benefits. The report suggests limiting the share of wages replaced by Social Security benefits. Or limiting Medicare eligibility. Or charging higher Medicare premiums. Or reducing insurance subsidies for working people under President Obama's Affordable Care Act.
At a time when even Republicans are vowing to deliver "every penny" that's been promised to seniors, most of these ideas could be dismissed as non-starters in Washington. Even popular solutions, like making the well-off pay more in taxes to support Social Security, are politically fraught. And while some Democrats are holding out a higher Social-Security income cap as the answer to our budget woes, the Moody's report makes clear that that option, on its own, would fall well short of solving the problem. To stabilize the federal debt load, policymakers may need to raise taxes AND cut benefits.
The good news, at least from Moody's perspective, is that the nation has bought itself some time. Though the budget battles of the past few years have been painful to watch, they did manage to restrain spending and raise a little bit of cash. So, Hess said, the ratings agency is feeling "comfortable" with the state of U.S. finances, even if nothing more gets done in the final years of Obama's presidency.
"We don't think the political configuration in Washington right now indicates they will actually do anything," Hess said. "But we're confident for the next several years."

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.

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