Discussion
Per Eckefeldt*
The excellent chapter by Jagadeesh Gokhale tries to answer the crucial question on how
the EU countries should cope with ageing populations in the euro area characterised by
centralised monetary policy and decentralised fiscal (economic) policies. The author
draws on his extensive research in the area of intertemporal allocation of resources and its
implications for the design of sustainable pension policies.
This issue is highly topical in the face of population ageing in the coming decades
worldwide and especially in Europe. In particular, the reform of the EUs fiscal
framework, the Stability and Growth Pact underscores the importance of appropriately
catering for long-term sustainability concerns also in the medium-term budgetary policy-
making process. In more practical terms, the chapter focuses on fiscal imbalances
measures. A similar measure, though with some differences, is regularly used in the EUs
analysis of long-term fiscal sustainability (called the S2 sustainability gap indicator; see
European Commission, 2006).
With regard to the results in the chapter, it should be noted that the chapter's estimated
fiscal imbalance of some 8% of GDP (about 7% points due to implicit debt and about 1%
point due to explicit debt), is considerably higher than the Commission's estimate of 3½%
of GDP (according to the so-called S2 sustainability gap indicator consistent with
respecting the intertemporal budget constraint of the government over an infinite
horizon). An important source of difference could be the assumption of ‘current policies’.
Gokhale appears to assume that the tax/benefit structure of age and gender remains
unchanged over time (a preliminary assumption that may need to be modified). The
Commission’s data allows splitting the projected increase in the pension expenditure ratio
in the EU. While the old-age dependency effect is very strong, reflecting the projected
strong increase in the old-age dependency ratio (doubling in the period to 2050), this is to
a considerable degree offset by a notable decrease in the benefit ratio (i.e. average
pensions in relation to GDP per worker) and also to some extent by lower take-up ratio
(see again European Commission, 2006).
This results from the fact that the EUs long-term budgetary projections explicitly model
the institutional settings in each Member State with respect to pensions. In many cases,
this implies that public spending on pensions on average will rise slower than average
income in the future, due to pension system reforms aimed at exactly containing spending
pressures arising from an increased number of older people.
The impact of reforms is very important in the EU fiscal surveillance. In particular, with
the reform of the SGP, the medium-term objectives for the government budgetary
position should fulfil a triple aim: (i) provide a safety margin with respect to the 3% of
The views expressed in this chapter are those of the author and are not attributable to the European
Commission.
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