U.S. Credit Threat
by Joseph Morris
Issue 100 - January 30, 2008

The sleeping giant of U.S. economic problems is the looming hulk of unfunded liabilities of public sector income-transfer, welfare, and government employee retirement programs.

At the Federal level, the unfunded liabilities of the Social Security, Medicare, and Medicaid systems are huge.   The most recent public report of the Trustees of the Social Security System puts the current combined unfunded liabilities of Social Security and Medicare for the next 75 years (that is, the arbitrary lifetime of all Americans now alive) at $33.2 trillion, which is roughly three times the size of the entire U.S. economy.

In early January a major private-sector rater of credit-worthiness, Moody's, warned that the issue of the unfunded liabiiities of Social Security, Medicare, and Medicaid is putting in jeopardy its "AAA" rating of U.S. Government securities.

According to “Investor News” reporter Darla Mercado:

The United States could lose its triple-A credit rating within the next ten years unless Medicare and Social Security are reformed, Moody’s said. Although the country’s level of general government debt is lower than that of other AAA-rated nations, such as Canada, France and Germany, it continues to rise. A 15.5% rise in Medicare benefits contributed to a 6.5% increase in government spending, and that is expected to continue growing as a part of a long-term trend, a Moody’s report found.

Although during the 2007 fiscal year, the U.S. deficit shrank to $248 billion, or 1.2% of the gross domestic product, due to growth in tax revenues, the Bush administration hasn’t done enough to aggressively trim deficits, the report by the credit ratings, research and risk analysis firm noted. The problem will leave a huge mess for the new administration to clean up as the 2010 expiration date on tax cuts approaches.

Moody’s report also saw a growing risk of an outright recession.  

Unfortunately, it is not only the federal government. Countless State and local governments continue to buy "labor peace" by offering generous retirement benefits, often rather than wage increases, thus obtaining current services and deferring bills for payment by future taxpayers.

Reform is possible. When I served at the U.S, Office of Personnel Management during Ronald Reagan’s first term our reforms of the Federal civil service retirement system in 1984 stemmed the growth of unfunded liabilities for Federal pensions.

For a very long time the problem of Federal unfunded liabilities seemed to be a mere abstraction.  Now, however, it takes on a whole, new coloration of a very practical sort.  Since the days of Alexander Hamilton, the credit of the U.S. Government has been the highest imaginable, the standard by which credit is measured. Unless government officials start facing the fact of our enormous liabilities, those days will be over for good.

Joseph Morris was general counsel at the U.S. Office of Personnel Management and is a lawyer in Chicago and member of the Board of Directors of the American Conservative Union