Towards a better understanding of implicit debts
The first goal of this thesis is to create a better understanding of the concept Implicit Pension Debt. This is necessary since the possibility of IPD influencing the (perception of) sustainability of public finances calls for a good and uniform way of measuring IPD. We argue that the existing literature on IPD lacks a complete overview of the concept and its use. Moreover, current cross-country IPD studies are inconclusive, and the IPD levels found in the studies differ substantially. The contribution of this thesis to the existing literature is that it gives an overview of IPD: the basics of the concept, methodologies in measurement, the use and the strengths and weaknesses are discussed. The second goal of this thesis is to illustrate the use of IPD as a tool to measure the success of a reform. To achieve this goal, the level and future path of the IPD created by the Dutch first pillar pension plan is estimated, both when the retirement age is increased and when the retirement age is kept constant. The results indicate that increasing the retirement age will immediately have an impact on the IPD level of the Dutch first pillar pension plan, but it will take time for the reform to show up in expenditure figures. Furthermore, by increasing the retirement age, the IPD created by the Dutch first pillar pension plan could be reduced significantly. The remainder of this thesis is structured as follows: Section 2 provides a complete theoretical overview of the concept IPD. Various studies that have measured IPD are compared and discussed, along with the basics of the concept, the relation between IPD and explicit debt, strategies to reduce IPD and the use of the concept. Section 3 explains that public pensions are not the only source that create IPD, and that next to implicit debts there are also implicit assets. Section 4 describes the model, data and assumptions used for estimating the IPD of the Dutch first pillar pension plan. Section 5 presents and discusses the results of this estimation. It also shows the impact of the assumptions made on the results. Section 6 concludes.