Setting Targets For Government Budgets In The Pursuit Of Intergenerational Equit

The Stability and Growth Pact (SGP) adopted in 1997 originally set budget balance as the Medium-Term Objective (MTO) for all EU Member States, to create a safety margin under the 3% of GDP deficit ceiling. In a reform in 2005, MTOs were made country-specific and dependent on initial debt and the potential growth rate. They were agreed for a transition period, until the criteria for taking into account implicit pension liabilities under ageing populations were established. Preparations for this are currently (early 2009) ongoing. - Against this backdrop this paper explores possible benchmarks for setting MTOs under alternative rules for the public pension system, based on the principle of 'actuarial neutrality across generations'.