Indexation of pension payments: Finding a balance between inflation and wage changes in the economy

Abstract

The objective of the study is to analyze the effectiveness of the principles of regular indexation of insurance pensions practiced in the Russian pension system, as well as their compliance with the existing similar practice in other countries with pension provision and insurance pension systems. In international practice, these principles correspond to the initial belonging of these systems to one of two basic pension models — continental and Danish (Anglo-Saxon). With an annual increase in pension payments, the governments of countries with pension systems of the first model are guided by changes in the average wage in the economy, the second model — by the consumer price index. The aim of the study is to determine the most optimal formula for indexing insurance pensions in the Russian Federation. The authors use general scientific methods: analysis, modeling and comparison. The article analyzes the practice of indexing pensions that has developed in the Russian Federation and provides a calculation of the results of the valorization of such payments in the early 2000s. It also provides a theoretical justification for the need for the transitions to the indexation of pensions in accordance with the wage index in the economy. The study gives a comparative retrospective analysis of the level of indexation of pensions based on the consumer price index and the index of wage changes. This analysis is based on data from official statistical observations of inflation between 2011 and 2021, as well as the growth of income of employees. As a result of the study, the authors conclude that the annual pension indexation scheme adopted in Russia does not correspond to the modality of the domestic pension system and does not allow ensuring the standard replacement rate. The authors propose their own methodology for calculating the indexation coefficient based on the principles of the functioning of the domestic pension system as a continental-type insurance pension system. In addition, the article provides a calculation of the sources of funding for pension indexation in accordance with changes in wages in the economy.

Keywords

• pension
• indexation
• wage
• inflation
• effective rates of insurance premiums
• replacement rate