Public Debt and Pension Policy

Indicators of the sustainability of fiscal policies play an important role in the conduct of the international surveillance of fiscal policies. The construction of these indicators, however, is beset with serious problems. To illustrate, many authors have observed that conventional measures of public debt are potentially misleading indicators of public wealth and the effects of fiscal policy on the intergenerational distribution of resources (see, for example, Blejer and Cheasty (1 99 1 ) and Blanchard et al. (1990)). In particular, policies that do not directly result in an increase in public debt may yield similar effects to the accumulation of public debt in that they impose long-term budgetary costs and require an increase in tax rates or a cut in spending in the future. Examples of these policies include selling public assets, reducing public investments and public loans, and introducing unfunded public pensions. Indicators of fiscal sustainability should measure the long-run costs of these policies in order to avoid unsustainable fiscal policies that erode the stock of public wealth. Most studies that attempt to construct internationally comparable indicators of fiscal sustainability focus on forecasting government spending. The OECD and the IMF, for example, have examined how ageing would affect spending on social security pensions and health care into the next century (see, for example, Heller, Hemming and Konhert (1986) and Hagemann and Nicoletti (1989)). In this paper we focus on two issues that the literature on fiscal sustainability has largely ignored. The first issue concerns the way governments finance social security old-age pensions and the pensions of their own employees (Section 11). The second issue involves the relationship between, on the one hand, supplementary pension saving and, on the other hand, future revenues from the personal income tax (Section 111).