Later this year the Government will privatise part of Telecom Eireann. This may be the start of a process of selling State assets over the next few years. Yet there has been no debate about how to use the proceeds. The importance to the national economy of this decision may not be immediately apparent. However, if we look at Britain, many would now question what the economy there has to show from the proceeds of privatisation and oil surpluses realised in the 1980s.

In the Republic, the Government is likely to run a budget surplus of the order of £1 billion (#1.27 billion) this year. The privatisation of part of Telecom Eireann could boost this by a further £1 billion or more. Repayment of debt is a stated priority use for the surplus. While the fiscal trauma of the 1980s makes this politically attractive, it is not necessarily the optimum solution for the economy in the long run. Use of privatisation proceeds exclusively to further repay debt highlights even more clearly the nature of the problem.

By so doing the Government would be disposing of an equity market asset, thus forgoing a future stream of equity market returns. On the other side, reduction of debt with the proceeds would produce a saving equal to the yield on government debt. In the long run, returns to equities tend to be higher and more volatile than Government bond yields. There is a potential loss to the Government, in terms of higher equity returns foregone, in this switch.

The relative returns on equities and Government bonds would be the main consideration in the decision, were the Government's liabilities solely in the form of bonds. However, the Government has a potentially significant liability in the form of unfunded pensions, both public service and Social Welfare. The pace at which this liability is likely to grow is likely to be related to wage developments in the economy. Wages in turn are linked to overall economic growth. The unfunded pension liability of the Government is likely to rise in tandem with the real economy and thus will tend to run in line with returns on equities.

In balance sheet terms, before privatisation the Government has assets, such as Telecom Eireann, with equity market returns and a stream of tax income which rises and falls with the real economy. On the liabilities side, it has bonds, carrying an interest cost and unfunded pension liabilities, the cost of which relates to wages and the real economy.

By using privatisation proceeds to reduce bond liabilities, the Government would be increasing its exposure to the risk that equity markets will out-perform the return on Government bonds.

The value of the Government's ability to tax as an asset can vary significantly over time. We can't be sure we can raise taxes readily to meet rising unfunded pension liabilities at some future date. Over time, most economies experience significant changes in economic well-being as populations and technologies evolve.

The Republic has a young population, a high potential growth rate for GDP and taxes, and can afford to pay the pensions of the existing relatively small number of unfunded pensioners out of current income. However, ultimately, the population will age, and the growth rate of GDP and taxes will slow. At the same time the numbers in the pension age group will rise as the population ages and lifespan lengthens.

The ability to pay the same level of pensions relative to wages in the future, out of current income, may thus be impaired. This situation is a long way off for the Republic, but small provisions made early can have dramatically beneficial consequences in the long run.

Worldwide, demographic changes are leading to increased longevity and lower birth rates. This implies the dependent population rises relative to the working population and unfunded pension schemes will run increasingly into problems as a consequence. This is why there is currently a debate on the merits of funded and unfunded schemes.

In the Republic we have falling numbers in the under15 age group, but no big rise in the older groups for many years yet. We have time to plan and benefit from the experience of other countries with ageing populations and largely unfunded pension liabilities.

An objection to the setting up of a fund is that it could mean the current generation "pays twice". They are paying taxes to finance current unfunded pensioners and also, in effect, to set up a fund to pay for their own future pensions. Simply staying unfunded, would enable the Government to cut taxes and raise expenditure, benefiting the present generation compared to setting up a fund.

However, the Republic is cutting taxes and increasing expenditure about as rapidly as is sensible against the background of the current fast pace of growth. Thus, the current generation would not be "paying twice" if the remaining surpluses were used to set up a fund. They have no practical access to the remaining surpluses as things stand. Moreover, it is likely that the current generation of workers will be those at risk of reduced pensions relative to wages in the future if not funded.

The emerging bulge in the working population and decline in births will mean that the current generation of workers may be large relative to the next generation. Correspondingly, current growth rates may be much faster than future growth rates, raising the level of real wages, and the real liabilities of the unfunded scheme. Individuals from the current bulge in the working population may thus experience reduced pensions relative to wages, compared to current situation, if the State is to avoid accumulating unfunded pension related public sector deficits.

It may not be desirable for the Government to control public equity funds which might be seen as open to political influence. It has recently been suggested in the US that the political control problem could be overcome by setting up individually controlled pension schemes to which the Government contributed by matching funds put up by individuals. The individual's access to future social welfare pensions would be reduced accordingly.

The less well off might suffer in purely funded schemes since such schemes often involve a link between contributions and payments. For this reason, a combination of funded and unfunded pensions is favoured in many countries. The funded part links payments to contributions, and thus reduces the deficit risk of a pure "pay as you go scheme". The unfunded scheme can be primarily focused on the objective of redistributing income to the less well off.

The debate on unfunded versus funded pension provision needs to be addressed in the context of the use of surpluses and especially in connection with the application of the proceeds of privatisation.

Eunan King is an economist at NCB Stockbrokers