2/8  BIS central bankers' speeches  All the countries that experienced an acute crisis – Greece, Ireland, Portugal and Spain – now have budgets with deficits below 3% of GDP and a positive primary balance in their current account, with the exception of Spain. Last year, Spain still had a primary deficit of 0.5%, but this year it is very likely that they will also make a surplus. In some cases, this adjustment in the primary balance was in the double-digits, which is huge. Our analysis, and the IMF’s, shows that the positive current accounts that all of these peripheral countries have built are the result of a structural adjustment. This is not about lower imports and weaker demand; it is about the improved performance of exports and structural adjustments. And that’s very important. Second, in terms of the banking sector, the capital level of banks everywhere has increased and the average common equity ratio of banks here is 14.3%. There is no bank below 11% in the euro area. That also represents a huge reduction of risk. Then, third, there is the BRRD [Bank Recovery and Resolution Directive], which rules that if there will be any collapse of banks, then no bailouts by the public sector can be engineered – at least before there is a private bail-in of 8% of the total assets of the bank. So that’s a big risk reduction for national government budgets and for taxpayers. Banks are also building up their bail-in-able securities.
At the same time, an increase in life expectancy for each cohort will reduce the annual pension. This motivates the individual to remain in employment and to ensure that the system is sustainable. The National Insurance Scheme’s expenditure is financed directly over the central government budget. Decisions about national insurance benefits have a substantial influence on future taxpayers. These costs are not transparent when the budget is decided. Developments since 1967 show that such a pay-as-you-go system is not robust. Benefits change over time and costs can easily be pushed into the future. The alternative is a system where pension expenditure is covered by accumulated capital, i.e. a funded system. In a funded system, a decision to increase pensions or reduce the age of retirement will require the allocation of capital today to cover future expenditure. Such a fund provides a measure of the cost of increasing pension expenditure. Our pension system is complicated. In addition to the National Insurance Scheme, many other operators, including the central government, have established additional pension schemes. There are different rules for coordination and entitlement. Any shift to a fund-based system for the National Insurance Scheme will probably require transitional rules for many years ahead. However, I believe that it will be possible to find solutions to these practical problems. Distributional and practical considerations imply that minimum benefits in the pension scheme cannot depend on earlier employment, but should apply to everyone.