Setting targets for government budgets in the pursuit of intergenerational equity

The Stability and Growth Pact (SGP) adopted in 1997 originally set budget balance as the medium-term objective (MTO) for all EU Member States, to create a safety margin under the 3% of GDP deficit ceiling.

In a reform in 2005, MTOs were made country-specific and dependent on initial debt and the potential growth rate. They were agreed for a transition period, until the criteria for taking into account implicit pension liabilities under ageing populations were established. Preparations for this are currently (early 2009) ongoing.

Against this backdrop, this paper explores possible benchmarks for setting MTOs under alternative rules for the public pension system, based on the principle of ‘actuarial neutrality across generations’. The effects of privatisation of the mandatory pension system are spelled out.

The ongoing revision of the national accounts will establish new accounts for the (implicit) pension liabilities of governments. This will allow targets to be set for explicit and implicit government debt in the light of intergenerational equity.

One of the conclusions to emerge from current trends and policies is that reassessing the generosity of public pensions, especially the generously low retirement age in Europe, will remain high on the political agenda, as otherwise the burden to be shouldered by future generations will continue to increase

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