Abstract
Abstract Due to its complexity and incomprehensibility the mechanism for the annual pension adjustment has experienced rising criticism. We compare the actual formula and alternative adjustment proposals on the basis of different criteria. It will become evident that the current formula is better than its reputation suggests. However, a salary indexed adjustment formula extended to include a sustainability factor presents a valid alternative. Such a formula is coherent and predictable, it guarantees pensioners’ participation in the technological progress, it balances the opposing goals of stable contribution rates and stable replacement rates, it limits intergenerational inequality and leads to a self stabilizing pension system. Adjustment formulas that are indexed to the wage bill or the inflation rate turn out to be less appropriate because they don’t adequately account for future demographic changes.
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