BOX 10-4

Automatic Balancing Mechanisms in Canada, Germany, and Sweden

In Canada, an automatic balancing mechanism was introduced in 1998 and mandates action if:

  • An actuarial projection concludes that the Canada Pension Plan is not financially sustainable; and

  • An agreement between the central government and the provinces on necessary courses of action cannot be achieved.

Financial sustainability is defined relative to the ability to maintain a specific level of contribution over a period of 75 years. Should the level of contributions exceed a figure established bylaw, the automatic balancing mechanism would affect changes in both contributions and pensions. In this situation, the contribution rate would be increased by half of the excess of the steady state subject to maximum annual increase. The remainder would be covered by a freeze of pensions payable over a 3-year period.

In Sweden, an actuarial income statement and balance sheet of the non-financial, defined, pay-as-you-go, contribution scheme has been made every year since 2001. In addition, an automatic balancing mechanism can temporarily abandon the indexation of pension rights and current benefits to average wage growth if the stability of the scheme is threatened. Stability of the system is defined by a balance ratio that relates to the scheme’s assets and liabilities. A balance ratio of less than 1 means that the scheme is out of balance (i.e., liabilities exceed assets), and earned pension rights and current benefits are reduced according to the balance ratio rather than the average wage. This will continue as long as the balance ratio is less than 1.

In Germany, a sustainability factor linked to the national dependency ratio that is applied to the rate of indexation of benefits was introduced in 2005. In contrast to the triggers in Canada and Sweden, it is permanently activated—and may only be deactivated by an act of parliament—until the social security pension is sustainable under a determined contribution rate. Since 2008, the German government must report every 4 years how to meet targets for replacement and contribution rates.

must accomplish two seemingly conflicting goals: to be sufficiently punitive and unpalatable to force Congress and the President to achieve fiscal actions through the regular process; and to be sufficiently realistic and feasible to be regarded as credible if the target is not met through the regular process.

In 2008 a bipartisan coalition of budget experts embraced hard triggers for Social Security and Medicare (Brookings-Heritage Fiscal Seminar, 2008). The coalition’s proposal sets limits on growth for these programs, enforced by automatic cuts in benefits and premiums when those limits are

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