Discussing accrued‐to‐date liabilities

Abstract

AbstractThe international statistical community has a growing interest in the liabilities of pension and social security systems. The System of National Accounts 2008 encourages countries to provide detailed information in a supplementary table on pensions. The IMF Government finance statistics manual also encourages reporting of public‐sector balance sheets as part of government debt, and the European Union (EU) has mandated that all EU Member States compile estimates of accrued‐to‐date (ADL) liabilities for all pensions, including public‐sector pensions and social security schemes. The ADL liabilities for public‐sector pensions, which are often defined benefit, and typically financed on an unfunded (pay‐as‐you‐go) or partially funded basis, are likely to be very large in some countries, receive significant public scrutiny, and be misunderstood and/or misused. The article begins by reviewing the current requirements, disparity and ambiguity in existing accounting and actuarial standards. It notes the opportunities for “accounting arbitrage”, where countries can provide similar benefits in a different form to avoid placing these pension liabilities on the government balance sheet and/or to avoid required disclosure of pension liabilities. This article concludes that the ADL for social security and government‐sponsored pension programmes has little or no meaning, does not provide any information about the fiscal sustainability of a country's pension programmes and does not provide any useful information for comparing pension plans across countries. It argues that the best measure of fiscal sustainability for unfunded or partially funded pension programmes that are financed on a pay‐as‐you‐go basis is the financing gap, and that this “open group” measure of fiscal sustainability should be published alongside the ADL, supplemented by information on coverage rates, replacement ratios and expenditures as a per cent of GDP. The article concludes that pension expenditures as a per cent of GDP is probably the single best measure for cross‐country comparison.