Public Liabilities Under Uncertainty

Abstract

Vanne discusses the uncertainty surrounding generational accounting results for Finland, where economic activity is highly volatile. Estimates of the intergenerational balance of Finland have improved dramatically over the years 1995 to 2000, reflecting favourable macroeconomic circumstances, sound fiscal policies and measures taken by pension institutions. However, generational accounts depend on the long-term forecasts of a number of macroeconomic variables. To assess the underlying risks of the estimates, Vanne presents the results of simulations with stochastic population, productivity, interest rates and returns on stocks. The stochastic properties of the variables are estimated from historical data, assumed to be mutually independent. The paper highlights the relevant role that cyclical factors have on Finnish generational accounts via capital income tax revenues and the returns on assets held by the public sector.