New York, April 06, 2016 — While the United States (Aaa stable) government’s unfunded pension liabilities are significant, they are still overshadowed by the projected funding shortfalls for both the Social Security and Medicare programs, says Moody’s Investors Service.

The unfunded liabilities of the various federal employee pensions systems, covering civilian and military employee benefits, amount to about $3.5 trillion, or 20% of US GDP. Additionally, Moody’s estimates that unfunded state and local government pension plan liabilities are of the same magnitude, bringing the total shortfall to 40% of GDP.

However, historical precedent suggests that it is unlikely that the federal government will offer significant financial support for distressed state and local government pension plans. As a consequence, this portion of the liabilities only poses a small risk to the creditworthiness of the US.

The bigger challenge to the US comes from the unfunded liabilities for the Social Security and Medicare programs. The Social Security funding gap is estimated at $13.4 trillion, or 75% of GDP, while the shortfall from the Hospital Insurance component of the Medicare program amounts $3.2 trillion, or 18% of GDP.

“As the stand-alone sustainability of these two programs wanes with an aging population, Social Security and Medicare will be among the primary drivers behind a sharp widening of federal budget deficits that is expected to occur after the fiscal year 2018,” says Steven Hess, a Senior Vice President at Moody’s.

The unfunded US pension liabilities are not abnormally large when compared with other developed countries with high credit ratings, according to the report “Government of United States – Government Employee Pension Liabilities Are Moderate Compared to Social Insurance Programs.”

Canada (Aaa stable) has the lowest burden from unfunded liabilities overall (12% of GDP in 2014), after it pushed through reforms more than a decade ago. Australia (Aaa stable) now operates a primarily defined contribution pension scheme, but also has unfunded general government pension liabilities (21% of GDP) from its legacy defined benefit system. The UK (Aa1 stable) faces higher risks from its public pensions with large unfunded liabilities equal to 66% of GDP in 2014.

The report is available to Moody’s subscribers at

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