Ageing populations are hitting public finances across the world, with rating agencies warning that recent interest rate rises have increased the impact of higher pensions and healthcare costs.
As interest rates soar in response to the biggest surge in inflation for a generation, Moody’s, S&P and Fitch have all warned that worsening demographics are already hitting governments’ credit ratings.
They add that downgrades are likely without sweeping reforms, threatening to create a vicious circle of higher fiscal burdens and rising borrowing costs.
“In the past, demographics were a medium- to long-term consideration,” said Dietmar Hornung, associate managing director at Moody’s Investors Services. “Now, the future is with us and already hitting sovereign credit profiles.”
The US Federal Reserve, European Central Bank and Bank of England all raised interest rates this month to their highest levels since the financial crisis — increasing governments’ debt servicing costs.
“While demographics are slow-moving, the problem is becoming more urgent,” said Edward Parker, global head of research for sovereigns and supranationals at Fitch, which downgraded France’s credit rating last month, warning that president Emmanuel Macron’s reform agenda could stall.
“We are well into the adverse effects in many countries, and they are only growing,” Parker added.
Rating agencies say the rise in borrowing costs is compounding both the impact on growth of changes in working age populations, and the hit to public finances of increasing healthcare and pension bills.
This has affected the outlook for debt in the EU, where, according to the European Commission, the share of the population over 65 will rise from 20 per cent now to 30 per cent by 2050, as well as in Japan and the US.
Marko Mrsnik, lead sovereign analyst at S&P Global Ratings, added that, according to an S&P stress test, a single percentage point increase in borrowing costs would increase debt to gross domestic product ratios for Japan, Italy, the UK and the US by around 40-60 percentage points by 2060.
“That is a very significant increase, and implies reforms that either address ageing pressures or other fiscal reforms would likely be needed if government debt is to remain sustainable,” he said.
S&P said in January that roughly half of the world’s largest economies will have been downgraded to junk by 2060, up from a current level of around a third, if measures are not taken to ease the costs of ageing populations.
It estimated that, in the absence of reforms to ageing-related fiscal policies, the typical government would run a deficit of 9.1 per cent of GDP by 2060, a huge increase from 2.4 per cent in 2025.
S&P also forecast that pension costs would rise by an average of 4.5 percentage points of GDP by 2060, reaching 9.5 per cent, albeit with a large variation among countries. The rating agency projected that, between 2022 and 2060, healthcare spending would rise by 2.7 percentage points of GDP for the median country.
“The longer governments defer action, then the more painful that action will be,” said Parker of Fitch.
In a possible sign of the pressure, Congressional Republicans are calling for spending cuts and structural budget reform in the highly charged confrontation over the US debt ceiling.
Analysts say that worldwide, central and southern European countries have among the worst demographic profiles, while singling out Germany, whose population is ageing at one of the fastest rates globally.
A Moody’s note this year said the strain on the German labour market was “already visible”, adding that: “potential growth will weaken further in the coming year without reform”.
Rating agencies have also sounded alarm about the structural deficit of the pension system in Spain, where the government recently re-established a direct link between payments and inflation, as well as France’s record in managing its finances.
But they credit Greece for sweeping reforms to its pensions system after its debt crisis. In S&P’s survey of 81 countries, it was the only state in which age-related spending was expected to fall by 2060.
By contrast, several Asian countries have a deteriorating outlook because of demographic pressures. “If you look to 2050, then Korea, Taiwan and China are some of the countries with the worst profiles,” said Parker.
Additional reporting by Barney Jopson in Madrid