Chapter V. Review of old-age benefits

169. Maintenance of purchasing power of pensions is one of the fundamental problems faced by social security systems. Pensioners are particularly vulnerable to inflationary processes, in so far as their pension is their main, if not their only source of income. This is why it is essential to protect them against loss of real value of their pension due to variations in the economic situation.

170. Many developing countries, and those of Latin America in particular, are currently suffering from severe inflation. In most industrialised countries, the particularly high rate of inflation in the last decade has in many cases been brought down in recent years. Even in this case, however, the question of reviewing pensions is still vital, if one considers that a constant inflation rate of 3 per cent per year, for instance, which is generally considered moderate, will result in a price increase of 100 per cent in about 23 years, cutting the purchasing power of pensions by half. Where the inflation rate is a little over 5 per cent per year, the real value of pensions is halved in only about 14 years.

I. International standards

171. As early as 1952, the International Labour Conference concerned itself with the adjustment of long-term benefits, and old-age pension in particular, in order to take account of changes in the cost of living. This is why paragraph 10 of Article 65 of Convention No. 102, as well as paragraph 8 of Article 66, (Endnote 1) stipulate that "the rates of current periodical payments in respect of old age ... shall be reviewed following substantial changes in the general level of earnings where these result from substantial changes in the cost of living". The principle of review of old-age benefits was reaffirmed in similar terms by Convention No. 128, which underscores the importance which it attaches to this issue by devoting a specific provision to it in Article 29. Paragraph 1 of this Article specifies that "the rates of cash benefits currently payable ... shall be reviewed following substantial changes in the general level of earnings or substantial changes in the cost of living". (Endnote 2)

172. It should be pointed out here that the above-mentioned provisions of Convention No. 102 and those of Convention No. 128 only state the obligation to adjust benefits, without, however, stipulating the methods for discharging this obligation. Neither do they prescribe the periodicity of reviews, which should be undertaken following substantial changes in the general level of earnings and/or the cost of living. Thus, the application of these provisions by no means involves setting up a system for the automatic adjustment of benefits by reference to a specified index. However, while States are free to choose the method of adjustment which they consider to be most appropriate to their national context, they are none the less required to adhere in good faith to the objective of these provisions, which is to maintain the real value of old-age benefits, in particular with respect to changes in wages and/or the cost of living, as is clear from the preparatory work on Conventions Nos. 102 and 128. (Endnote 3)

II. National situations

173. A study of national legislation and practice shows that there are three main methods of adjusting pensions to variations in the economic situation: (a) systematic adjustment, where the principle and methods of adjustment are laid down in legislation; (b) adjustment according to general principles stated by the law, without specifying any method or degree of adjustment; and (c) adjustment on an ad hoc basis.

Systematic adjustment

174. This method has become far more widespread since the Second World War. Although very few countries used this method at the time, today it is applied in the vast majority of industrialised countries, as well as a number of developing countries. (Endnote 4) Legislation providing for a systematic adjustment of benefit lays down not only the principle of adjustment, but also the necessary methods. (Endnote 5) Adjustment is based on changes in the cost of living, (Endnote 6) the general level of earnings, (Endnote 7) or other criteria, such as changes in the minimum wage (Endnote 8) or a combination of factors. (Endnote 9) Generally, the amount of the adjustment is not fixed in advance but is determined by variations in the economic indicator adopted as a basis (general level of earnings, cost of living, etc.). In some countries, however, the percentage of the increase is fixed in advance by legislation, but these cases are rare and are mainly confined to the centrally planned economy countries. (Endnote 10) In addition to the indexation of pensions, certain systems provide for increases in order to take account of improvement in wages and of the standard of living. (Endnote 11)

175. In some systems, pensions are periodically adjusted on fixed dates. In some countries, adjustment occurs once a year; (Endnote 12) in others every six months (Endnote 13) or even at quarterly intervals. (Endnote 14) According to the system in force, adjustment on fixed dates may be conditional upon a certain degree of variation in the indicator chosen as a basis. (Endnote 15) In countries with a high inflation rate, pension adjustments may lag considerably behind variations in the economic situation. (Endnote 16) One country seeks to overcome this problem by recently adopting a legislation which, in addition to annual adjustment of pensions according to changes in the general wage level, also provides for a system of interim adjustment, in which pensions are increased within two months following any general increase in the remuneration of public servants. (Endnote 17)

176. In other countries, pensions are adjusted at irregular intervals as soon as the indicator has risen by a certain amount since the last adjustment (Endnote 18) or there has been a change in the reference basis. (Endnote 19)

177. It should, however, be pointed out that in some systems, pension adjustment is a direct corollary of the procedure fixing the amount of pension. (Endnote 20) For example, in one country where there is a universal pension scheme and a supplementary earnings-linked pension scheme, both pensions are calculated according to a basic amount which is periodically reviewed, so that any change in the basic amount automatically results in an adjustment of pension. (Endnote 21) Although in most countries the adjustment coefficient is applied in the same way irrespective of the amount of pension, in other systems, on the other hand, pensions are only partially adjusted if they exceed a certain amount. (Endnote 22)

Adjustment in accordance with general principles

178. In many countries, the law confines itself to stating the principle of adjusting pensions according to variations in economic conditions, without specifying the rules and procedures. (Endnote 23) It is left to the competent authority, within its terms of reference and taking into account the financial situation of the scheme, to decide whether pensions should be adjusted, and if so, when and by how much. In some systems, however, the legislation prescribes the minimum frequency with which benefits should, in principle, be adjusted (Endnote 24) the interval usually being between one and five years. The Committee was interested to note that in one country where the legislation provided for an annual adjustment of pensions according to changes in the minimum wage, the body administering social security has adopted measures to adjust pensions whenever there is a change in the minimum general wage. (Endnote 25)

179. According to the system in force, benefits may be adjusted where there is a change in the cost of living, (Endnote 26) the wage level (Endnote 27) the minimum wage (Endnote 28) or a combination of factors; (Endnote 29) in most of these cases, adjustment will only take place if the variation is "significant" or "considerable".

180. In order to have a clear picture of the way these systems work, additional information is needed on their implementation in practice and in particular on pension adjustments decided by the competent authority in accordance with its terms of reference under the legislation. Few governments, however, have communicated such information, although one government did state that the annual revalorisations of old-age pensions in recent years have been higher than the increase in the minimum wage. (Endnote 30) The available information shows that in another country old-age pension was increased several times between 1 July 1975 and 1 January 1987. (Endnote 31) According to the information communicated by another country, the rate of old-age pension was adjusted in 1980 following an actuarial review which is carried out at least once every five years. (Endnote 32)

Adjustment on an ad hoc basis

181. In several countries, pensions are adjusted although the legislation does not provide expressly for review procedures. A number of governments have supplied detailed information on pension adjustments in recent years. (Endnote 33) On the other hand, some governments stated in their reports under article 19 of the Constitution that benefits are periodically reviewed, without, however, specifying the frequency and the amount of these adjustments. (Endnote 34)

III. Evaluation

182. One cannot analyse the various systems for adjusting old-age benefits without knowing a certain number of economic indicators showing the changes which occur over a specified period in the amount of pension with respect to variations in the cost of living and wage indices. This is why both the report forms on Conventions No. 102 and 128 adopted by the Governing Body under article 22 of the Constitution and that adopted under article 19 of the Constitution contain a request for statistical information to enable an appreciation of the operation of the review system in practice. While most of the governments which have ratified one of these Conventions regularly supply the statistics requested, this is not the case of the vast majority of the governments which are not bound by these instruments.

183. In the past, the vast majority of States which have ratified Conventions Nos. 102 and 128 did not appear to have encountered any difficulties in applying the provisions concerning review of benefits. In most cases, old-age benefits have been adjusted to changes in the cost of living or the wage level in order to prevent them from being eroded by inflation. An ILO study carried out on several industrialised countries, nine of which have ratified Conventions Nos. 102 or 128, showed that pensions at least maintained their purchasing power over the period 1963 to 1975. (Endnote 35) Since then, however, in the wake of the economic crisis, an increasing number of countries have adopted measures to slow down the adjustment of benefits. Thus some countries suspended indexation for a certain period (Endnote 36) or postponed the dates for the adjustment of benefits. (Endnote 37) Other governments changed their indexing systems, for example by providing that henceforth pensions would be adjusted in inverse relation to the amount of pension. (Endnote 38) In other countries, certain elements used in fixing the index have temporarily been excluded from the calculation basis. (Endnote 39) Another type of change was the adoption of a new method of review. (Endnote 40)

184. According to the available information, these measures aimed at achieving financial savings and combating inflation appear to be becoming more widespread. (Endnote 41) This is why the Committee, while fully aware of the concerns shown by governments, addressed a general observation on this matter to the countries which have ratified one or both of Conventions Nos. 102 and 128, bearing in mind the impact such measures may have on the purchasing power of pensions. In certain specific cases, the Committee also considered that it needed additional information, in particular the statistics which are to be established in the manner set out in the report forms. (Endnote 42) In two of these cases, the review of periodical benefits was the subject of comments by trade union organisations. (Endnote 43)

185. As regards the countries for which neither the part relating to old-age benefit of Convention No. 102 nor that of Convention No. 128 are in force, some have adopted methods for the systematic adjustment of old-age benefits. However, owing to the lack of statistical information on changes in the rate of benefit with respect to variations in the economic indicators, the Committee has been unable to assess in every case how far pension recipients are adequately protected against inflation in practice. From the information available to the Committee it seems that some of these countries have also recently adopted measures to slow down pension increases. (Endnote 44) The question should also be raised as to how these systems operate in practice in countries with a high inflation. (Endnote 45)

186. In the systems where the adjustment percentage (for example 2 per cent per year) is fixed in advance, problems may arise if the adjustment fixed is less than the increase in the cost of living, unless the figure is then corrected. (Endnote 46)

187. As for the many schemes which leave it to the competent authority to adjust benefits as the need arises (irrespective of whether the principle of adjustment is laid down in legislation), few governments supplied information enabling an assessment to be made of changes in pensions with respect to the cost of living. In these systems there is a serious risk that the gap between variations in economic conditions and the adjustment of pensions may widen with time and become considerable. This is also true of countries which fix lengthy intervals between pension reviews. This is why the Committee considers that it is particularly desirable for governments to make periodical reviews at the closest possible intervals, and adopt the necessary measures to adjust old-age pensions accordingly. In this context, one government whose legislation provides for the general principle of adjustment of pensions according to the general level of earnings and the cost of living, stated that in view of the extraordinarily high inflation in recent years old-age pensions already in payment have been adjusted proportionally (and no longer on a degressive scale) to the increase in wages so as to ensure that no pension falls below two-thirds the current minimum wage; pensions were increased six times between April and December 1987. (Endnote 47)

188. Other governments, and in particular those of French-speaking African countries, appear to favour what could be termed a mixed system. Although they have not adopted the principle of automatic indexing of old-age benefits based on a given indicator, they have applied a formula enabling the minimum pension to be systematically adjusted according to changes in the guaranteed minimum inter-occupational wage. This formula is all the more useful, because in some of the schemes under consideration at least, minimum pensions account for 60 to 90 per cent of all pensions, the figure varying from one country to another. In countries where particular difficulties arise, this type of solution may be a first step towards providing a better guarantee of the purchasing power of current pensions. The same is true of systems which seek to review minimum pensions according to other criteria.

189. Lastly, the Committee should point out that the information supplied by a number of governments has not always enabled an appreciation of the measures taken or envisaged to ensure that current pensions are adjusted to the cost of living. (Endnote 48)

190. The examination of the legislation of various countries shows that since the last general survey an increasing number of countries have introduced more or less automatic methods of indexation. The Committee would like to emphasise that this constitutes progress, although in recent years governments have increasingly tended to adopt measures to slow down the adjustment of pensions, without, however, calling the principle itself into question. It should also be pointed out that an equally large number of countries only undertake ad hoc adjustments, dictated by circumstances, or those in accordance with a general principle laid down by legislation. Although such adjustment methods certainly do not guarantee the same degree of security for recipients as systematic indexing of benefits, they are none the less capable of providing effective protection and thus meeting the objectives of Conventions Nos. 102 and 128, provided that the frequency and amount of the adjustments keep in step with changes in the economic situation, which, unfortunately, is far from being the case in many countries.

191. In the years following the economic crisis which began shortly after the oil crisis of 1974, the Committee endeavoured to study as closely as possible the adverse effects of inflation and even "stagflation" (inflation accompanied by economic stagnation) on old-age pensions in order to satisfy itself that the relevant provisions of Conventions Nos. 102 and 128 were being fully applied. (Endnote 49) The fact is, however, that any lag in keeping up with the rising cost of living, especially in high-inflation economies, will almost certainly drastically affect pensioners' budgets. On this point, the Committee considers that, whatever the method chosen to implement Articles 65 and 66 of Convention No. 102 and Article 29 of Convention No. 128, probably the best guarantee of pensioners' legitimate right to protection of their purchasing power is the full participation of representative organisations of protected persons in the choice and implementation of methods for adjusting pensions. The community as a whole should be made aware of, and hence responsible for, the need to ensure, in the name of social justice, that the pensioners of today are given back a fair share of what they contributed as members of the workforce on whose shoulders the well-being of modern society rests.

Endnotes

Endnote 2

Endnote 3

Endnote 4

Endnote 5

Endnote 6

Endnote 7

Endnote 8

Endnote 9

Endnote 10

Endnote 11

Endnote 12

Endnote 13

Endnote 14

Endnote 15

Endnote 16

Endnote 17

Endnote 18

Endnote 19

Endnote 20

Endnote 21

Endnote 22

Endnote 23

Endnote 24

Endnote 26

Endnote 27

Endnote 28

Endnote 29

Endnote 30

Endnote 31

Endnote 32

Endnote 33

Endnote 34

Endnote 35

Endnote 36

Endnote 37

Endnote 38

Endnote 39

Endnote 40

Endnote 41

Endnote 42

Endnote 43

Endnote 44

Endnote 45

Endnote 46

Endnote 47

Endnote 48

Endnote 49

Cross references
Constitution: Article 19
Constitution: Article 22
Constitution: Article 35