EUROPE – There are potential tensions between pension reform and the European Union’s Stability and Growth Pact, says the International Monetary Fund.
The IMF says that a shift to the private pre-funding of pensions, on the Chilean model of the early 1980s, would be a “SGP-unfriendly” move in the short term. It says the deficits in the public pension system would “contribute negatively to the general government’s fiscal position”.
On the other hand, the IMF said two other possible reform routes would not have such an impact on the pact. It said that a shift to pre-funding on the US old-age and survivors trust fund model would be “SGP-friendly”.
And closing pay-as-you-go financing gaps on a year-by-year basis by raising contributions or cutting benefits would be “SGP-neutral”, the IMF said.
The EU’s so-called “umbrella strategy” for pension reform stresses the public pre-funding and parametric changes. “This umbrella strategy provides little encouragement for shifting to private per-funding and is thus unlikely to create tensions with SGP rules.”
The 18-page paper was prepared by Albert Jaeger and is part of a larger assessment of the euro zone economy. It went on to say that the “build-up of a substantial private pension pillar could, however, be costly in fiscal terms and may therefore not jibe well with present interpretations of the SGP”.
The Stability and Growth Pact is designed to maintain budgetary discipline of euro zone countries.
IMF director Michael Deppler said on a conference call on the paper: “Is the stability pact pension reform friendly? And the answer is yes, basically because you can deal with many of the problems of population aging through a cautious fiscal policy, but the other aspects that the paper underlines is that there really is a need to develop privately-funded pillars in Europe, partly so that people have a place to build up savings, which they're not going to be able to build up in the public sector.
He added that there is a need for “more disinterested and informed information” to make people aware of what the issues are in the longer term. He said the pensions debate in Europe tends to be “very polarized”.