Indexing pensions

Pension indexation should anchor the parameters of the pension system to one or more economic and demographic variables to ensure that the system is implemented in a sustainable way, while minimizing distortions affecting important economic choices. Arguing that financial sustainability, incentive compatibility and consistency across multiple government programs are critical, the author examine the many linkages between the various parameters of pension schemes. Finally, the author turn to the cost of the insurance dimension of indexation, and suggest that option pricing techniques could be used to price indexation guarantees, and that this approach may suggest refinements to indexation practice not thus far implemented.