Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005



Table 2:

Baseline Scenario: Keeping Generosity of PAYG

2004

2010

2020

2030

2040

2050

GDP per capita

1.7

1.7

1.6

1.5

1.3

1.2

Private Investment/GDP

15.5

16.5

18.1

19.3

19.3

19.0

Unemployment Rate

8.1

8.3

9.0

10.0

11.3

12.8

Real Interest Rate

4.9

4.6

4.0

3.4

3.0

2.9

Retiree Cons ./Worker Cons.

1.8

1.7

1.7

1.6

1.6

1.6

Pension/GDP

9.7

10.3

11.6

13.3

15.4

17.3

Social Security Contributions

14.9

15.8

17.8

20.4

23.5

26.5

GDP per capita: % deviation from baseline levels. The remaining figures are percentage point deviations
from baseline levels.

4.2. Scenario 1: Debt financing of additional pension spending after 2005

The government guarantees the 2005 pension replacement rate and at the same time freezes the
pension contribution to the current level. The difference between contributions and actual pension
expenditure is financed via an increase in government debt. With a constant contribution rate (of
currently 16%) the share of pensions covered by the PAYG contribution would decline from 100%
to about 66% in 2050. In other words the pension contributions of workers would only finance a
replacement rate of about 50% in 2050. After 2050 debt accumulation is stopped via an increase in
lump sum taxes. As shown in figure 3, debt is on an explosive and clearly unsustainable path.

Debt and Deficit to GDP Ratio

------Debt to GDP ratio .......Deficit to GDP ratio


Figure 3 Debt Financing of additional Pensions

Employment, GDP, Consumption and Capital

—I—Employment .......GDP -----Consumption ∙ Capitall


Real Interest Rate


84




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