Pension systems, ageing and the stability and growth pact

This paper addresses the link between two major European policy issues at the heart of the macroeconomic debate: (1) coping with rising public expenditures caused by population aging, and (2) the adherence to the EU’s fiscal rules, notably to the provisions on public finances in the Stability and Growth Pact (SGP) (as revised in 2005). The analysis is concerned with the long-term sustainability of public finances. Although the SGP, especially after its revision in 2005, clearly aims to ease the financial burden to be shouldered by future generations, it does not incorporate intergenerational equity explicitly and systematically. The simple model in this paper provides such a framework, based on the rule that generations that are identical in terms of demography (longevity and fertility) and retirement age should face the same tax rate for the same level of benefits.