Csaba Feher

1. From Analytical Work to Policymaking and Fiscally Responsible LegislationRegional Pension Policy WorkshopMajuro, April 25-29, 2016 Csaba Feher Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management

2. Current Reporting Practices and Their Consequences • Special features of public pension schemes • Social security “balances sheets” are cash accounts (budgets”) • In pensions, everything is long-term • Demographic trends • Impact of regulatory changes • Maturity of pension liabilities is several decades • No full funding requirement or asset-liability matching either by definition or by regulation • No information on complete impact of changes >> decisions made on the basis of short-term effects • Contribution rate and base >> future pension expenditures • Higher/lower entry pensions >> welfare impact only in the future • Indexation >> compounded interest effect • Mandatory funded schemes >> higher immediate deficit, lower liabilities • Nationalizing private pension assets >> higher future liabilities

3. Metrics for Public Pension Finances Medium- to long-term expenditure dynamics (IMF) • Pros: • simple (relatively) to produce and understand • captures cycles and volatilities • Cons: • disregards revenues and the room for additional taxes Changes in Public Pension Expenditures

4. Metrics for Public Pension Finances • Fiscal gap type indicators = immediate or time-contingent adjustment needs to offset the spending increases in the future • Examples: • Pension-Adjusted Budget Balance • Net (Unfunded) Pension Liabilities • Pros: • Full cost of regulatory changes can be presented • Cons: • Complicated to project • Not straightforward to interpret • Doesn’t capture macroeconomic and demographic cycles, temporary regulations • Stock/level vs. change • Levels: not suitable for international comparison • Change: fiscal impact and sensitivity analyses within the same country

5. Fiscal Rules Definition: A fiscal rule is a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates which aim to correct distorted incentives to ensure fiscal responsibility and debt sustainability. • Common pool problem • Myopia Instruments: • Numerical targets, expenditure ceilings as medium-term anchors • Debt rules, deficit rules, expenditure rules, revenue rules Current practices: • Central government or general government, short- to medium term • “Sustainability reports” • Problem areas: long-term liabilities (PPPs, environment, pensions)

6. Are Public Pensions a Suitable Suspect for Fiscal Rules? • YES. • Long-term commitments need long-lasting constraintsbecause of myopia (among other things) • Lack of asset-liability matching and the time-inconsistency of maturities lead to distorted incentives • Pension liabilities are unreported debt • Inter-generational equity > common pool problem • CONSIDER: REPORTED PUBLIC DEBT VS. FISCAL GAP (total liabilities – total revenues)

7. Possible Expansion to Public Pensions • Step 1: Establishing reporting standards, projection methodologies and indicators • Step 2: Establishing procedural rules, including ones curtailing the growth of unfunded liabilities (mandatory offsetting) • Step 3: Fiscal rules, establishing ceilings on the change of both funded and unfunded pension liabilities

8. Step: Projections, Indicators and Reporting • Data and technical capacity to project pension expenditures and revenues • Individual earnings data • Establishing and maintaining technical capacity • Microsim-based cohort models (or simpler models, initially) • Behavioral responses (iffy) • Indicators (simple, stable, relevant) • Total pension liabilities • Net liabilities • Years when deficit exceeds a benchmark • Permanent and time-bound adjustment needs • Permanent and time-bound revenue increases • Reporting • Budget • Every time a bill substantially impacts on pension finances • Periodic policy reviews

9. Step 2: Procedural Rules • No draft bill should enter legislature without long-term fiscal and distributional impact analyses, including • Indicators should show the net impact of regulatory changes, so that it is not dissolved in methodological amendments and modified assumptions • All expenditure generating proposals should be accompanied by commensurate revenue-generating proposals: = • Regular policy evaluation (“Social Security Advisory Council) Net present value of marginal assets/revenues Net present value of marginal expenditures

10. Step 3: Fiscal Rules • Objectives: • Projections, indicators: forming expectations • Procedures: no constraint on pension policy but information is rendered unavoidable • Fiscal rules: numeric rules static or dynamic real or relative with/out escape rules • Examples: • No growth or gradual reduction of unfunded liabilities • No growth of gross pension spending, relative to baseline

11. Thank you! Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management