system for the young cohorts. On the other hand, since the size of old cohorts increases, this tends
to reduce the likelihood of pension reforms. In such a framework, feasible reforms worsen the
budget because the income of alive retired workers need to be maintained. Beetsma and Debrun
(2004) analyse the trade-off between short-term budgetary discipline and growth-friendly reforms
with up-front budgetary costs in a model comprising inefficiencies related to deficit bias in
governments’ behaviour which justify the need for deficit rules. The authors show that in such a
context there may be a case for designing numerical deficit rules in such a way to account for the
budgetary impact of growth-enhancing structural reforms.
In the present context of European policy-making, the argument related to systemic pension
reforms introducing funded schemes recorded outside the government sector are of particular
relevance. Following a Eurostat decision of March 2004, all mandatory, fully-funded, defined-
contribution pension schemes need to be classified outside the government sector, even if the
pension fund is organized and managed by the government. This implies the reclassification of
pension schemes in countries that implemented reforms creating funded pillars in recent years
(Denmark, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia) or that plan to carry out such
type of reforms in the future.20 The negative impact on budgets of systemic pension reforms
implying the classification outside the government of funded schemes can be quite substantial,
amounting up to more than one percentage point of GDP in some cases.21 Moreover, although
being transitory, the negative budgetary impact could be quite long-lasting. Simulations for the
EU-15 aggregate based on the QUEST ageing model of the European Commission show that the
budgetary deterioration associated with a partial replacement of a government-run PAYG scheme
with a funded scheme classified outside government would cause an increase in the debt/GDP
20 The decision by Eurostat of 2 March 2004 on the classification of pension schemes implies that funded defined
contribution pension schemes should be classified outside the government sector. The rationale underlying the
decision is that these schemes, even when run by the government, should be considered as owned by the pension
beneficiaries, who are those bearing most of the risk of the scheme. EU countries are required to implement the
Eurostat decision, by classifying funded, defined-benefits schemes outside the government sector, by March 2007 at
the latest. See Eurostat News Release 30/2004, 2.3.2004, available at:
http://epp.eurostat.cec.eu.int/cache/ITY PUBLIC/2-02032004-BP/EN/2-02032004-BP-EN.HTML
21 In the case of Sweden, the re-classification of the funded DC pension scheme introduced with the reform of 1998
will result in a reduction of the general government budget balance estimated in the order of 1% of GDP per year.
An overview of the Swedish pension system is provided in “The Swedish National Pension System”, Ministry of
Health and Social Affairs and National Social Insurance Board, September 2003 and can be found at
http://regeringen.se/content/1/c4/05/07/aa589a7c.pdf. Hungary has reported in its March 2004 Excessive Deficit
Procedure fiscal notifications a negative budgetary impact from the reclassification of its funded scheme of 0.9% of
GDP in 2003 and 2004. Poland in it fiscal notifications reported a negative impact of, respectively, 1.7 and 2% of
GDP in 2003 and 2004 (European Commission (2005)).
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