Welfare Reform on the Web (January 2009): Pensions - overseas

Pensions under ageing populations and the EU Stability and Growth Pact

R. Beetsma and H. Oksanen

CESifo Economic Studies, vol. 54, 2008, p. 563-592

This article explores how the Stability and Growth Pact (SGP) may cope with the future costs of population ageing in the European Union. Population ageing has forced member states to reform their pension systems by reducing the generosity of payments and by switching to funded rather than pay-as-you-go provision. This study explores how such reforms will affect the ability of member states to adhere to the fiscal rules set out in the SGP and how the SGP itself may incentivise or discourage reform. The article also presents a simple model providing numerical illustrations of public debt, deficits and implicit liabilities under different pension and fiscal arrangements. The model highlights the need to introduce (partially) funded pensions to maintain intergenerational equity.