Moody's Strips US of Top Credit Rating After Over a Century

For over a century, the United States held the financial world’s highest seal of approval: a perfect Aaa credit rating from Moody’s. That changed in May 2025, when Moody’s downgraded the U.S. to Aa1, citing a $36 trillion national debt. This rare move, the first since 1917, followed similar cuts by Fitch in 2023 and S&P in 2011. It’s a signal that even the world’s economic powerhouse isn’t immune to fiscal strain.

The downgrade didn’t come out of nowhere. Years of rising deficits, now at 6.4 percent of GDP and projected to near 9 percent by 2035, have piled on pressure. For people unfamiliar with economic jargon, this matters because it could lead to higher costs for loans, from home mortgages to small business financing. It also raises questions about the U.S.’s ability to keep its global financial dominance.

This news might seem like it belongs in boardrooms, not living rooms. But its impact reaches everyone. A lower credit rating could reshape how governments, businesses, and households plan for the future. So, what’s behind this debt spiral, and how does it affect the world beyond Wall Street?

The U.S. debt, now over $36 trillion, stems from a few key drivers. Entitlement programs like Social Security and Medicare account for a massive share of spending. These programs support millions but face looming shortfalls. Projections show Social Security’s trust fund could be depleted by 2035, with Medicare’s hospital insurance fund close behind by 2036. Meanwhile, interest payments on the debt have soared to $800 billion a year, doubling in a decade.

Political stalemates have made things worse. Some lawmakers advocate for reforming entitlements, such as raising the retirement age or limiting benefits for high earners. Others focus on increasing revenue through taxes on corporations or wealthier households. Both sides agree the debt is a problem, but consensus on solutions remains elusive, leaving deficits to grow.

Economic growth could ease the burden, but it’s not outpacing debt. The debt-to-GDP ratio, a key measure of fiscal health, has climbed past 120 percent, a level unseen since the 1940s. Investors still see U.S. Treasury bonds as a safe bet, largely because the dollar dominates global finance. Yet, without action, that confidence could waver, raising costs for everyone.

The U.S. debt’s effects extend far beyond its borders. As the world’s largest economy, its fiscal policies influence global markets. Higher U.S. Treasury yields, spurred by the downgrade, increase borrowing costs for other nations. Emerging markets, already stretched, face capital flight and currency swings. The International Monetary Fund warns that global public debt could hit 100 percent of GDP by 2030, partly driven by U.S. trends.

The dollar’s status as the world’s reserve currency has kept markets steady. It powers 88 percent of international transactions and holds 58 percent of global reserves. But analysts at forums like Davos caution that persistent deficits and policies like tariffs could erode trust over time. If countries shift to euros or other currencies, the U.S. might face steeper borrowing costs and less economic leverage.

Credit rating agencies play a pivotal role here. Their assessments, like Moody’s Aa1 rating, move markets. After the May downgrade, Treasury yields rose 15 basis points in a day, showing their influence. While investors haven’t panicked, these signals shape perceptions of risk, affecting everything from pension plans to foreign debt markets.

Reversing the downgrade requires bold, practical steps. Moody’s emphasizes debt sustainability, which means addressing entitlements, raising revenue, or both, while spurring growth. Proposals include gradually raising the Social Security retirement age to 69, adjusting Medicare eligibility to 67, or increasing payroll taxes by one percentage point. These could save $4 trillion by 2050, extending program solvency.

Revenue ideas include taxing incomes above $400,000 more heavily or closing corporate tax gaps to push federal revenue to 21 percent of GDP. Pro-growth advocates suggest simplifying the tax code to boost investment. Each path has trade-offs: benefit cuts could strain retirees, while tax hikes might curb business expansion. Finding common ground will test lawmakers’ ability to prioritize long-term stability.

History offers hope. In the 1990s, bipartisan cooperation produced budget surpluses, shrinking the debt ratio. Today’s challenge is steeper, but the ingredients—discipline, pragmatism, and compromise—remain within reach. The key is acting before the debt limits options further.

The Moody’s downgrade isn’t a crisis, but it’s a clear warning. It highlights a fiscal path that can’t continue indefinitely. Markets still trust U.S. bonds, and the dollar remains king, but these aren’t guarantees. If interest costs keep rising, they could squeeze out funding for schools, roads, or defense, making it harder to tackle future challenges.

For everyday people, the stakes are tangible. Higher borrowing costs could mean more expensive loans or strained local budgets. Globally, economic instability could disrupt trade and jobs. Yet, this moment also offers a chance to rethink priorities and build a stronger economic foundation through tough but necessary choices.

Fixing the debt won’t happen overnight. It demands honest discussions about what’s sustainable and what’s at risk. By confronting the issue now, the U.S. can protect its financial standing and ensure stability for generations to come.