Promises, Promises. Better Measuring the Effect of Pension Reform

We all hope to retire one day. Our pensions hold the promise of that. Good fiscal policy means thinking about ho w policy decisions—involving long-term promises, such as pensions—affect government finances both today and in the future. With pension reform a priority for so many countries, it is a problem that traditional deficit and debt indicators focus on the health of public finances today, but fail to capture the future impact of pension promises. We propose a new indicator—the “pension-adjusted” budget balance—that can help measure when changes in pension policies are improving or worsening long-term fiscal health. Used as a complement to traditional indicators, this new indicator could help avoid incentives to delay or even reverse pension reforms.