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Switching to Full Wage Indexing of Earnings Related Pension Benefits Would Be Costly

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  • Lassila, Jukka
  • Määttänen, Niku
  • Valkonen, Tarmo

Abstract

A recent citizens’ initiative calls for a switch from indexing pension benefits to consumer prices (80%) and wages (20%) to full wage indexation. Such a reform could increase private consumption and government tax revenue in the short run. This is especially the case if the increase in pension expenditures is first financed by decumulating pension funds. In the long run, however, the reform would require a much higher contribution rate and result in lower private consumption compared to the current system. The reform would increase pension expenditures slowly but permanently. Therefore, it would be a very clumsy way of stimulating the economy. Possible stimulating effects would not suffice to finance the reform. The reform would benefit especially the cohorts that are about to retire when the reform is implemented. They would receive higher pension benefits throughout their retirement period, without paying higher contributions. All future cohorts would be worse off.

Suggested Citation

  • Lassila, Jukka & Määttänen, Niku & Valkonen, Tarmo, 2016. "Switching to Full Wage Indexing of Earnings Related Pension Benefits Would Be Costly," ETLA Brief 51, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:briefs:51
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