New ways of evaluating public pension expenditure
On 20 March 2017, the 19 members of the Eurogroup agreed on a new approach to comparing public pension expenditure. In order to ensure the fiscal sustainability of pension systems, six indicators will be used to benchmark against the best performers. This system of benchmarking in conjunction with best practices are intended to provide Member States in the eurozone with guidelines for reforming their pension systems, even though they are pro forma non-binding.
Six indicators to be used
The indicators consist of a set of two key fiscal indicators and four flanking indicators; the latter take into account country-specific situations. Particular weighting is placed on the existence of automatic adjustment mechanisms. Projecting future developments will be supplemented by scenarios with unfavourable macroeconomic or demographic conditions. Finally, the social adequacy of pension systems will be considered as part of the benchmarking exercise.
The first key indicator identifies the fiscal gap over the projection horizon in order to show the effort required to bring debt ratios back to 60% of GDP within 15 years. This includes taking into consideration the additional expenditure expected from an increase in the ageing population. Explicit focus is on the contribution from pension expenditure to this fiscal gap.
The second key indicator is similar to the first, but this time the horizon is infinite.
The flanking indicators begin with a comparison of statutory retirement age and its evolution. The second flanking indicator provides an insight into the effective retirement age by looking at the average age at which people leave the labour force. The third indicator describes the number of pensioners in relation to all persons aged 65 or more (coverage ratio) and the fourth indicator compares the average pension in relation to the average wage (pension benefit ratio).
Benchmarking to start in 2018
Benchmarking will commence in 2018 and be repeated every three years. It will be conducted within the context of existing institutional processes and mechanisms, in particular the Ageing Reports from the European Commission and the assessment of national stability programmes. Pension sustainability is the second benchmarking exercise from the Eurogroup. The first benchmarking exercise was introduced in September 2015 to reduce the tax wedge on labour. In principle, this describes the difference between gross and net wages, taking into consideration social contributions.