Entitlement Reform at the Heart Of Moody's Warning

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Published September 12, 2012

| FOXBusiness

Underlying the warning from Moody’s Investors Service that it would cut its triple-A rating on the U.S. is a concern that the U.S. government has lost control of entitlement programs.

“Because of the aging of the population, upward pressure on entitlement spending will gradually increase the size of government unless there is significant reform of entitlement programs, which form the bulk of what is termed ‘mandatory’ spending,” Moody’s says.

Moody’s says what’s key to a possible downgrade that may come next year is this: It is demanding a downward trajectory in the federal deficit, which at $16 trillion now surpasses 100% of the nation’s economic output, plus policies that stabilize spending. The U.S. economy is growing at only $256 billion on an annualized basis, and the government’s debt load has grown by about $5 trillion under President Barack Obama.

But the credit-rating agency pointedly adds that to reduce spending and stabilize the country’s finances, reform of Medicare, Social Security and Medicaid is needed, through revenues, expenditures, or both. It says that would “add stability to any long-term fiscal plan, in that entitlement programs are not part of the annual appropriation process and are much more difficult to change.”

However, entitlement reform also seems an unlikely path for Congress and the President at a time when half of the country derives some of its wealth from a government check.

According to Census Bureau data, 49% of the population lives in a home where at least one member of the household gets some kind of government benefit, as of the first quarter 2011, the latest data available. Data from the government agency show that 49% compares to just 30% in the early 1980s, and just over 44% in the third quarter of 2008.

Food stamps, jobless benefits and Medicaid made up the bulk of the government payouts, along with Medicare and Social Security payments.

While polls show Americans blame entitlements for the fiscal incontinence, they also show they balk at these cuts. Which could mean – once again – that our credit rating is already lost, given that Standard & Poor’s downgraded its triple-A rating on the U.S. one notch in the 2011 fight over the debt ceiling and government spending.

Moody’s notes that “mandatory” spending has risen in recent decades to well over half of total federal spending, and its proportion is projected to continue to rise unless there are reforms in Medicare, Medicaid, and Social Security.

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