Macroeffects of combined indexation

Abstract

The indexation of benefits to wages has attractive features (see Chapter 4 above). There is an international trend, however, to replace wage indexation with price indexation or, as a compromise, with combined wage and price indexation (compare the Hungarian pension reform in Chapters 4, 9 and 18). In this Chapter, we shall show that this change yields only a temporary slow-down in the growth of total pension expenditures, and results in a step-by-step permanent relative deprivation of the older cohorts vis-a-vis workers. (János Réti called my attention to this apparently overlooked phenomenon and I express my gratitude to him here.)