OECD Social, Employment and Migration Working Papers
This series is designed to make available to a wider readership selected labour market, social policy and migration studies prepared for use within the OECD. Authorship is usually collective, but principal writers are named. The papers are generally available only in their original language - English or French - with a summary in the other.
- ISSN: 1815199X (online)
- https://doi.org/10.1787/1815199X
Pensions, Purchasing-Power Risk, Inflation and Indexation
The rapid rise in inflation in 2006-07 has attracted attention – once again – both to how pensions systems should react to changes in prices, and to how they do so in practice. Although inflation is now falling as a result of lower commodity prices and weakening demand, this brings with it the risk of
deflation – falling prices – which also raises questions as to how pension systems should react.
Most OECD countries have a legislated commitment to indexation of pensions in payment. However, the empirical evidence in this paper shows that these rules have frequently been over-ridden. Furthermore,
because indexation to price inflation rather than wage inflation is much more common – and wages can be expected to rise more rapidly than prices – the effect of following legislated indexation rules will be to
reduce pensioner incomes compared with those of the working-age population. However, indexation to prices is less costly, allowing a larger initial pension than under earnings indexation for a given budget
constraint.
This paper sets out current, national indexation policies and historical data on how pensions have been adjusted in practice. It examines different indexation policies: to prices, earnings or a mix of the two; the
choice of the price index and progressive indexation (where smaller pensions are increased more rapidly than larger).
JEL:
D14: Microeconomics / Household Behavior and Family Economics / Household Saving; Personal Finance;
J14: Labor and Demographic Economics / Demographic Economics / Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination;
D80: Microeconomics / Information, Knowledge, and Uncertainty / Information, Knowledge, and Uncertainty: General
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