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Controlling the effects of demographic risks: the role of pension indexation schemes

Published online by Cambridge University Press:  04 July 2005

JUHA M. ALHO ,
SVEND E. HOUGAARD JENSEN ,
JUKKA LASSILA  and
TARMO VALKONEN
JUHA M. ALHO
Affiliation:
University of Joensuu, Finland (e-mail: juha.alho@joensuu.fi)
SVEND E. HOUGAARD JENSEN
Affiliation:
CEBR, SDU and University of Southern Denmark, Denmark (e-mail: shj@cebr.dk)
JUKKA LASSILA
Affiliation:
ETLA, Finland (e-mail: jla@etla.fi)
TARMO VALKONEN
Affiliation:
ETLA, Finland (e-mail: tv@etla.fi)
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Abstract

Within a model featuring demographic uncertainty, this paper studies a pension reform where public pension benefits are indexed to the total wage bill rather than to the average wage level. This implies a decline in the variability of contribution rates and an increase in the variability of replacement rates. While thus shifting some of the adjustment burden following demographic shocks to pensioners, the trade-off in risks is found to be fairly moderate.

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Type
Articles
Information
Journal of Pension Economics & Finance , Volume 4 , Issue 2 , July 2005 , pp. 139 - 153
Copyright
© 2005 Cambridge University Press

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Footnotes

This paper has benefited from joint research with Romas Lazutka and Audrone Morkuniene. Eija Kauppi has provided efficient research assistance. An earlier, and much different, version of this paper was presented at the ENEPRI conference on ‘Demographic Uncertainty and the Sustainability of Social Welfare Systems’ in Brussels, January 2003. We are grateful to the participants and, especially, to an anonymous referee for helpful comments. Financial support has been received from the European Union's Phare ACE Programme (P98-1023-R) and the 5th Framework project (QLK6-CT-2002-02500). Opinions expressed are those of the authors, and should not be assumed to be those of the European Commission, or any other sponsor.