While global warming is still a potential threat to a country’s creditworthiness, the impact aging populations will have on sovereign debt and public finances poses a bigger threat to the developed world, including the United States, according to the leading global ratings agency.
Standard and Poor’s says that global warming and global aging are the two “mega-trends” that dominate the discussion about global economic challenges. But there is still a lot of uncertainty surrounding the impacts global warming will have on individual countries, while the impacts of growing pension, healthcare and welfare costs are widely understood and relatively clear.
“Our conclusion is that over a multi-decade time horizon the financial consequences of aging societies are likely to overshadow all other economic trends for most sovereigns,” S&P said. “We also expect advanced economies will be more negatively affected than sovereigns in emerging markets.”
Rich countries, like the U.S. and many European nations, have saddled themselves with trillions of dollars of unfunded liabilities and debt. A study by University of California-San Diego economist James Hamilton found that the U.S. reported debt of $16.7 trillion is just the tip of the iceberg because of its $70 trillion in off-the-books debt at the end of 2012.
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“The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds,” Hamilton wrote. “The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt.”
The biggest contributors to the U.S.’s off-the-books debt were entitlement programs: Social Security and Medicare. Both of these programs are meant to assist retired people with living and medical expenses, but both are presented with the problem that the U.S. population is aging and there won’t be enough working people to support them.
Hamilton reports that the Social Security program has $26.5 trillion in unfunded liabilities and Medicare has $27.6 trillion unfunded liabilities. Some European nations and Japan are already feeling the strains of aging populations on their public welfare programs and fiscal planning.
“The impact of aging societies is already being felt in several advanced economies, most notably Japan, and will steadily increase through the next few decades,” S&P notes. “For most sovereigns, their demographic profile is such that the full impact of aging on economic performance and public finances will be felt from the mid-2020s or soon after (note: this is well beyond the time-horizon that can be reasonably applied to a sovereign credit rating).”
S&P notes that while aging is a concern for developed countries with relatively high credit ratings, this is less of a concern for developing countries that tend to have younger populations and lower credit ratings.
But it’s these countries that S&P warns would be more vulnerable to the effects of global warming because it will be harder for them to absorb the economic costs of increased natural disasters and warmer weather.
“In contrast, while most sovereigns will feel the negative effects of climate change to some degree, we expect the poorest and lowest rated sovereigns will bear the brunt of the impact,” S&P noted. “This is in part due to their reliance on agricultural production and employment, which can be vulnerable to shifting climate patterns and extreme weather events, but also due to their weaker capacity to absorb the financial cost”
“There are multiple channels through which climate change can affect the growth prospects of national economies and eventually levels of prosperity,” S&P continued. “Some of the most potent may be changing patterns of rainfall that can reduce agricultural yields via repeated and prolonged droughts, heat waves and wildfires, or floods.”
“Extreme weather events, especially floods, can be expected to increasingly take a toll on a country’s infrastructure and thus productivity, exacerbating weakening endowment of productive infrastructure observable in a number of countries,” S&P added.
While many scientists worry about potential more extreme weather events in the future, there is little evidence to support the notion that weather has already been made more extreme by global warming.
The United Nations Intergovernmental Panel on Climate Change has said there is “limited evidence of changes in extremes associated with other climate variables since the mid-20th century.”
And research by Dr. Roger Pielke, Jr., with the University of Colorado found it is “misleading, and just plain incorrect, to claim that disasters associated with hurricanes, tornadoes, floods or droughts have increased on climate timescales either in the United States or globally”
“It is further incorrect to associate the increasing costs of disasters with the emission of greenhouse gases,” according to Pielke.
But while S&P has warned that a country’s creditworthiness could be hurt if the predicted effects of global warming become observable, the credit rating agency has not revised anyone’s credit because of global warming.
This stands in contrast to the fact that S&P lowered U.S. long-term and short-term credit ratings in 2011 because the “fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what… would be necessary to stabilize the government’s medium-term debt dynamics.”
“Our understanding of climate change, on the other hand, is still developing and we lack sufficient reliable data to make precise predictions on if and when the effects of a warming planet and changing weather patterns will overshadow other factors,” S&P notes. “By its very nature of complex and inter-connected ecological systems, weather is inherently unpredictable and the picture can change suddenly and dramatically for an individual country or region.”
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