Slowing down pension indexing: the foreign experience

Between 1975 and 1983, Canada, Finland, Sweden, the United Kingdom, and the Federal Republic of Germany--countries faced with immediate or long-term financing difficulties in their social security systems--modified their social security pension adjustment procedures. These changes in pension adjustments very often were made in conjunction with other restrictive measures such as increased contribution rates and/or contribution ceilings, or tightened criteria for eligibility of benefits. Four types of changes, applied separately or in combination, were made to slow down the rate of pension growth: (1) changing to a different index or modifying the index in use (Finland, Sweden, and the United Kingdom); (2) delaying implementation of pension adjustments (Finland and Sweden); (3) capping annual pension increases (Canada and West Germany); and (4) changing the index review period (the United Kingdom). Generally, these changes have had the desired effect of reducing pension growth. Finland, however, changed its indexing procedure in 1977 only to find that the new index grew faster than the old index for both 1978 and 1979. Since 1980, however, Finland's new pension adjustment index has been growing less rapidly than its old index.