Who governs pension indexation? Automatic government and the limits of quiet retrenchment in Europe

What the paper says

The literature on pension reform presents pension indexation as an effective tool for ‘quiet retrenchment’ performed through automatic formulas that obscure real losses in purchasing power. But so far, we lacked comparative studies of the long-term patterns of adjustment rates applied to old-age pensions that could substantiate that view. This paper presents an original country-year dataset of such rates across 20 EU countries (2002-2024), accompanied by a review of national rules and reforms, and evaluates long-term indexation outcomes against inflation and wage growth benchmarks. Findings show that those outcomes are anchored primarily in macroeconomic trajectories and political decisions rather than codified formulas. There is no evidence of sustained loss of purchasing power through under-indexation, with only modest losses recorded in several countries. Conversely, all countries have under-indexed relative to wages, pointing to a decline in the relative material status of long-term pensioners. European indexation regimes cluster on shared economic trajectories, not formal indexation rules, and indexation’s adherence to inflation does not correlate with its adherence to wage growth. Overall, indexation formulas appear as weak commitment devices. Indexation remains publically salient, and governments continuously resort to ad-hoc adjustments in benefit levels, whether to pursue fiscal consolidation or to signal generosity.