Automatic adjustment mechanisms in pension systems

The chapter describes automatic adjustment mechanisms in mandatory pension schemes in OECD countries. About two‑thirds of OECD countries employ such mechanisms, including notional defined contribution (NDC) schemes, links of the statutory retirement age to life expectancy, benefit adjustments to changes in life expectancy, demographic ratios or the wage bill, and balancing mechanisms. The chapter discusses what automatic adjustment mechanisms can and cannot do, as well as possible alternative policies. AAMs can be useful tools to prevent pension schemes from becoming increasingly unsustainable as populations age. Finally, it proposes some guidelines for designing and implementing automatic adjustment mechanisms based on OECD countries’ experiences with revising or overturning such mechanisms. This includes the need for wide political agreement on their introduction and avoiding mechanisms that reduce pension benefits in payment in nominal or real terms.