Significance of Index Security

The aims of index security for earnings-related pensions are to

  • help ensure a reasonable starting pension for a new pensioner, considering the income level while still working
  • preserve the purchasing power of the pension in payment.

Without index security, the starting pension amount may be modest, and the purchasing power of the pension in payment may quickly weaken in the course of retirement.

From the beginning of 2005, all pension schemes began determining the pension based on the average earnings of a person’s entire career, which further emphasised the significance of index security during the active period. According to calculations, the index security share will account for approximately half of the starting pension in the future.

The chart shows an example of indexation by the wage coefficient. The assumption in the calculations is that the index of wage and salary earnings will rise by 3.5 per cent per year, and that the earnings development at the individual level will follow the development in the index of wage and salary earnings. The pricing level is expected to rise by 1.72 per cent per year. The individual’s starting salary is EUR 3,000/month.

ind1en

The person in the example will have accrued a monthly pension of EUR 12,000 by the age of 65. An unindexed pension would be 40% smaller.

The size of the index security share in a pension in payment largely depends on the length of the retirement period and the development of the pricing and wage levels.

 

the_proportion_of_index_adjustments

If the pension recipient turned 65 between the years 1996 and 2004, his or her descriptor would be placed between the two descriptors in the chart.

For example, for a pension that began 30 years ago, the share of pension period index security alone is approximately 75 per cent in 2010. In pensions that began already 20 years ago, the share of index security is approximately 35 per cent.

When taking into account index security from the active period as well as the retirement period, the amount of an earnings-related pension that has been running for a long time would amount to only one tenth of the actual amount being paid, if index security was not applied.