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investments. On the other hand,
the scaled premium system would require the revision of the contribution rate at intervals, although not so frequently as in the case of the assessment system. A particular advantage of the scaled premium system is its flexibility, in the sense that it permits the adjustment of the contribution rate to changing conditions. It is noteworthy that the Actuarial Subcommittee of the ILO Committee of Social Security Experts, meeting in Geneva in April 1964. concluded that the scaled premium system is particularly appropriate for new pension schemes in developing countries.
Mention should also be made of a special financial system which is applied to pensions payable under employment injury benefit schemes, termed the system of assessment of constituent capitals. Under this system, the contribution rate is so fixed that the income from contributions in a given period, say a year, is equal to the capital value of pensions awarded in the same year. The reserves which accumulate under this system of financing will, in theory, be equal at any moment to the capital value of all pensions then in payment.
Adjustment of ocial security benefits under changing economic conditions
in
In the face of changing economic conditions, benefits which are fixed monetary terms will tend to depreciate. Social security schemes may therefore provide for the adjustment of benefits to compensate for this loss.
A distinction should be made between adjustments linked to changes in the cost of living, and those linked to changes in the standard of living. In the former case, adjustments are usually related to a consumer's price index, and in the latter to an index of wages or earnings.
The method or mechanism of adjustment may vary between schemes depending upon the structure of the scheme, and
in
particular, on the methcd of fixing contributions, the pension formula a nd on the financial system adopted. The mechanism for adjustment may provide only for adjustment of new pensions or the adjustment may also apply to pensions in course of payment. If the pensions are fixed at flat rates the problem of adjustment is practically the same for new pensions and for pensions in course of payment. On the other hand, if the pensions are determined in relation to wages, a mechanism for adjustment is incorporated in the benefit formula. If the pension is calculated on the basis of the last wage, the adjustment of new pensions is practically complete. If the pension is based on the vages over a long period there will be the problem of adjustment of the wages serving as a basis for the calculation of the pension. For example, if the pension is calculated on the basis of the average wage over the last ten years and there has been a substantial increase in the cost of living or the general level of wages during that period, it is necessary to make an adjustment of the wages over the whole ten-year period in order to obtain a complete adjustment of the new pension to be awarded.
From the legislative point of view, three methods of adjustment of pensions in payment may be distinguished:
"ad hoc" adjustment; which means that the law does not contain any provisions relating to adjustments;
adjustment in principle;
which means that the law provides for periodic review of the problem of adjustment of pensions to economic conditions without specifying either the procedure, mechanism or degree of adjustment;
systematic or even automatic adjustment; which means that the law prescribes the procedure, mechanism and degreement of adjustment.
The financial consequences of the adjustment depend on the financial system itself. For example, if the system of annual assessment is applied and if the contributions and benefits are fixed directly in relation to the wages, a complete adjustment of both new pensions and of pensions in course of payment is obtained. On the other hand,
if,
under a scheme where both contributions and benefits are fixed in relation to wages, a financial system based on funding is applied, only partial adjustment can be obtained; the greater the accumulation of reserve funds, the less the possible degree of adjustment, unless the contributions are increased. The adjustments a re sometimes financed by other sources, such as state subsidies,
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