The paper addresses the link between (1) the rising age-related public expenditures, especially pensions and the resulting need for pension reforms, and (2) the EU's fiscal rules in the Treaty and in the Stability and Growth Pact (SGP; 3% of GDP ceiling for deficit and 60% reference value for public debt).

 (3) Data/Methods:
The (revised) SGP is reviewed. A model is constructed to provide numerical illustrations of public debt, deficit and implicit pension liability under different pension and fiscal arrangements, with explicit attention to a transition towards (partial) funding that might be required for intergenerational equity. The model provides a neatly defined benchmark termed actuarial neutrality. The outcomes from the model are compared to the restrictions imposed by the SGP.
(4) Results/Expected Results:

1. Pure PAYG systems do not, in general, comply with actuarial neutrality but rather normally tend to shift an increasing burden to future generations.

2. For many countries where ageing related expenditure is projected to increase considerably under current policies, actuarial neutrality implies that reforms for reducing the expected expenditures should first be undertaken. The medium term objective for government budget balance should then be set on the basis of the reformed system. As long as the mono-pillar public pension system is maintained, actuarial neutrality implies that the target should be a significant budget surplus for several decades. If such a policy line is not accepted, further reforms, notably an increase in retirement age, should be executed. 3. The revised SGP now recognises the problem with the transitional cost of (partial) privatisation of the public pension system. However, the revised rules only allow a limited excess over the 3% of GDP deficit ceiling for a limited period of time. According to our results a partial privatisation on a fully actuarially neutral basis of a reformed and sound mono-pillar pension system may not easily be accommodated under the current rules. Hence, a country that maintains a mono-pillar system can be much more comfortable with the SGP rules than a country that contemplates and implements a partial privatisation of the system.
(5) Conclusion:

The provisions in the EU Treaty and the revision of the SGP in 2005 provide the improved legal framework for policies to comply with the principle of sound public finances. However, improving the implementation of the legal rules is an ongoing process as the issues are complex and adequate data is often lacking. The framework in the paper provides clarification to the issues to be tackled, highlighting the Implicit Pension Debt (accrued to date). The ongoing work of pension actuaries and statisticians to gather estimates on it for the revised national accounts will greatly help in analyzing the issues and designing economically sound reforms.