Aging states face greater economic constraints

As the country’s working age demographic continues to get older, state budgets, especially those in the Northeast, will face greater pressure from increased Medicaid costs, says a new report from S&P Global Ratings. Environmental, Social, And Governance: Increasing Generational Dependency Poses Long-Term Social Risks To U.S. States' Fiscal And Economic Stability examines those trends resulting from the shifting demographics. By 2035, the number of people age 65 and older is expected to outnumber those under the age of 18 for the first time in U.S. history. This is expected to create economic, fiscal and social challenges for state governments.

Although the report notes that generational dependency is considered a long-term social credit factor that may result in state credit deterioration, it goes on to say that prudent fiscal management will “ultimately dictate the direction of state credit quality.” Common trends to offset an aging population include natural population replacement and international in-migration, but both of those factors have been in decline in the U.S.

The relatively high cost of living in the North combined with waning economic growth in the region is expected to lead to additional increases in Medicaid enrollment there, and higher state spending on the program. Meanwhile, the South has benefited from an influx of working-age adults that has offset increases in retirees and slowed the region’s generational dependency growth. The region has undergone significant economic expansion the report notes, but it was disproportionately affected by the last economic recession and its concentration in mining and manufacturing left areas of high unemployment as wealth decreased.

The hollowing of America’s Midwest as younger residents leave, combined with the decline in manufacturing employment are expected to increase the economic burdens there, according to the report. And although the West remains attractive for retirees, housing affordability and other pressures, like California’s above-average poverty rate and above-average portion of its population on Medicaid, could undermine its potential resilience, the authors find.