Automatic pension indexation of euro-area public pensions is more likely to cause second-round effects, which can make inflationary shocks more persistent, according to the European Central Bank.

Currently, in almost all euro area counties, pensions are indexed automatically – fully or partially – to prices and wages, mostly in a backwards-looking way. In terms of pension increases, there are three categories that countries fall into. Ireland is the only country in which there is no automatic indexation of public pensions, and instead, increases are decided in the annual budget.

Whereas in six countries (Belgium, Greece, Spain, Italy, Luxembourg and Slovakia) there is full price indexation of public pensions. In Spain, this is enshrined in a new law to be applied from 2022, following a regime of no automatic indexation in place since 2014. In Greece, a nominal freeze is currently in effect, with the automatic pension indexation formula to apply again from 2023.

In 10 euro area countries, there is partial automatic price indexation. Indexation is categorised as partial because some restrictions on full price index adjustment may apply and/or other variables, most importantly the growth rate of economy-wide or private wages, are automatically taken into account.

In four members of this group (France, Cyprus, Austria and Portugal), full price indexation can be modified or restricted during the decision-making process. In the remaining six countries (Estonia, Latvia, Lithuania, Malta, Slovenia and Finland), pensions are automatically indexed to prices and wages, mostly in a backward-looking way.

Despite this link between pension indexation and second-round effects, the ECB said that looking ahead, December 2021 Eurosystem projections on pension growth is not expected to lead to significant second-round effects.

Euro area pension expenditure accounts for significant budget resources, which have grown recently. In 2020, the euro area public old age and survivors’ pension bills accounted for around 12.7 per cent.

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