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The 2005 reform of the Stability and Growth Pact has amplified the role of government debt and long-term fiscal sustainability in the surveillance of budgetary positions in the European Union (EU). Some aspects of the reform are still to be fully defined, including the role of implicit liabilities. This paper explores two main possibilities for accounting for such liabilities: using long-term expenditure projections and referring to estimates of the amount of pension liabilities. With reference to the former, the paper examines the pension expenditure projections available for EU countries and their use in the assessment of fiscal sustainability. While acknowledging the progress in the availability and quality of projections, the paper notes that their comparability is still unsatisfactory. Any mechanical use of existing pension expenditure projections should therefore be avoided. As to pension liabilities, the paper examines the main definitions and their potential role in the EU fiscal framework. It argues that pension liabilities may bring a clearer understanding of the impact of fiscal policies, may provide a measure of the cost of terminating pay-as-you-go pension schemes and may be useful for the measurement of deficits computed on an accrual basis. However, the level of pension liabilities does not provide indications concerning the sustainability of pension schemes and their effects on public budgets. Therefore, pension liabilities should not be added to conventional debt. Overall, the paper argues that both pension expenditure projections and estimates of pension liabilities can complement the current deficit and debt indicators. The paper concludes by pointing to the need to improve some technical and organisational aspects concerning age-related expenditure projections, such as the independence of forecasters, the transparency of projections and the degree of homogeneity in methods.

Pension Expenditure Projections, Pension Liabilities and European Union Fiscal Rules