European handling of implicit and explicit government debt as an obstacle to the funding-type pension reforms

Abstract

In light of an analysis of Hungarian experience and as a result of the lessons that can be learned from it, I show in this article that the terms of the Stability and Growth Pact (SGP, the so-called ‘Maastricht criteria’) are barriers to a desirable reform of pay-as-you-go (PAYG) type pension systems. Following on from this, a proposal to modify these criteria so that this problem is eliminated is presented. The main problem with the SGP is that it only deals with explicit government debt and ignores implicit debt. Although it renders reforms politically palatable, it will increase overall debt in the curse of reducing the explicit one. I also review the rationale and possible types of funding of pension systems and propose a simple model for identifying the likely time-span of the transition from a PAYG system into a fully funded one.