WRITTEN QUESTION E-2365/96 by Thomas Megahy (PSE) to the Commission (27 August 1996)

Subject: Unfunded pension liabilities and EMU

Has the Commission considered the danger, following monetary union, of excessive interest rates arising from pressures created by the existence of massive unfunded pension liabilities in certain Member States, and if so, what actions does it propose, or envisage being taken, in order to avoid this problem?

Answer given by Mr de Silguy on behalf of the Commission (25 November 1996)

Member States' pension systems differ substantially from one another in terms of financing methods, funded schemes being in the minority.

The financing of pay-as-you-go systems, as opposed to funded systems, will therefore represent a growing burden on the budgets of those Member States which rely on such systems and fail to adapt them as their population ages. However:

- the ageing of the population, like most demographic phenomena, is a slow process which will really only begin to give rise to problems after 2005-10. National pension schemes therefore have a fairly long time to deal with and prepare for this problem;

- although ageing is a demographic phenomenon that is reflected in changes in the working-age population, the financial burden deriving from the financing of pensions is necessarily related to the percentage of the total population who are in employment. If, therefore, the Community could in the long term restore the employment rates which it knew in the early 1960s, with a return to virtually full employment (facilitated in turn by a reduction in demographic pressure on the supply of labour), the burden of ageing per employed person would differ only very slightly from the present situation;

- moreover, budgetary convergence in the context of, firstly, progress towards economic and monetary union (EMU) and, secondly, the Stability Pact following economic and monetary union will re-establish in Member States' budgets the room for manoeuvre necessary to deal with the consequences of ageing;

- finally, recent studies (particularly those carried out by the Organization for Economic Cooperation and Development) show that, in view of the very progressive nature of the phenomenon, existing systems would not be fundamentally called into question, although it may be necessary to carry out socially acceptable reforms which can be implemented very gradually, such as, for example, the introduction of supplementary funded schemes. It is necessary to be aware, however, that the general introduction of funding would impose a substantial burden on the present generation, which would have to finance not only existing pensions, but also its own pensions in their entirety.

For these reasons, the Commission does not believe that unfunded pension systems will exert excessive pressure on interest rates following economic and monetary union. It should also be emphasized that the prospect of the restoration of public finances and of the more relaxed policy-mix that will accompany the EMU process will in itself exert downward pressure on interest rates, a trend which is already being confirmed as the process becomes increasingly more credible.

Finally, as regards in particular the debate under way in the United Kingdom concerning the financial burden which the United Kingdom might have to bear as a result of other Member States' pension liabilities, the Commission considers that this fear is entirely unfounded. Indeed:

- even after economic and monetary union, budgetary policies will remain essentially the responsibility of the Member States and, provided that they observe the sound management limits defined in the excessive deficit procedure (Article 104c of the EC Treaty), these policies will continue to be shaped by national requirements and circumstances, in accordance with the principle of subsidiarity;

- the EC Treaty has been accepted and ratified by all the Member States, who are therefore obliged to respect it. Article 104b very explicitly lays down that 'A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project';

- moreover, the Stability Pact will make it possible to control developments not only in the budgetary balance, but also in the government debt of each Member State, under threat of penalties, thus preventing any drift into debt which might weigh on the proper functioning of economic and monetary union.

It is inconceivable, therefore, that the pension liabilities of any Member State might be borne by the taxpayers of the United Kingdom or another Member State.