Putting Pensions on Auto-pilot: Automatic-adjustment Mechanisms and Financial Sustainability of Retirement-income Systems

This chapter analyses the automatic adjustment mechanisms introduced in public pension systems over the past 15 years. These mechanisms create automatic links between demographic or economic developments and the retirement-income system, particularly benefit levels. While these mechanisms generate greater sustainability of pension promises they normally worsen benefit adequacy. Old-age safety nets may need to be reinforced to address these concerns. Furthermore, automatic adjustment mechanisms are often complex, difficult to understand and create uncertainty over future benefits. In order for individuals to adjust to these new pension designs – by working longer or saving more in private pensions, there is a need for gradualism and transparency in the implementation. A fair and predictable burden-sharing across generations should help individuals to act pro-actively by adapting their saving and labour supply behaviour.