Wednesday, January 19, 2011

New CRR Issue in Brief: “Improving Sweden’s Automatic Pension Adjustment Mechanism.”

The Center for Retirement Research at Boston College has released a new Issue in Brief: "Improving Sweden's Automatic Pension Adjustment Mechanism," by Nicholas Barr and Peter Diamond.

 The brief's key findings are:

  • The economic crisis has provided a 'stress test' for many pension systems.
  • In Sweden, the crisis triggered an automatic 'brake' to restore financial balance and revealed two problems with the brake's design:
    • it can favor workers over retirees; and
    • it can result in large shocks for retirees.
  • In response, the brake could be modified to prevent unintended gains for workers and better insulate retirees from risk.

AB: In an AEI working paper back in 2008, I looked at how similar auto-adjustment features could be applied to the US Social Security program. Compared to some alternate approaches to reform, which actually increased the amount of uncertainty regarding future system financing, auto-adjustments could be designed to gradually change taxes and benefits so the program is always in balance and the costs of keeping it in balance are spread among as many generations of workers and retirees as possible.

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