What is pension indexing.

Indexing is an important part of the economy in any country. Therefore, literally all citizens of the country need to know what pension indexing is or what salary indexing is. In general, understanding what pension indexing means is essential for everyone who works towards this pension in the future. 

Indexing is generally a quite logical process that is used by the governments of many countries. After all, it is a kind of compensation that citizens receive. Essentially, it should align real prices (for goods or services) with a fixed wage level. 

Pension recalculation, what is it? 

Let’s start with the fact that the indexing of payments in Ukraine represents a mechanism for compensating for the loss of purchasing power of various social payments (pensions, salaries, benefits, etc.) under conditions of inflation. The goal of indexing is to protect citizens from a decline in living standards due to rising prices. So, the question of what is needed for pension recalculation is equivalent to the question of why and how often other payments are indexed. It primarily concerns the indexing of social payments, salaries, and pensions. However, some indexing should also be conducted by employers. 

The main aspects of payment indexing:

1. Protection against inflation. Indexing should compensate for the rise in prices for goods and services. For example, if the inflation rate over the year was 10%, payments may be increased by this percentage to maintain their real purchasing power.

2. Regularity. In Ukraine, indexing is conducted regularly, depending on the category of payment. For example, pensions are indexed annually taking into account the growth of average wages and inflation.

3. Calculation formula. Indexing is usually calculated based on official data on inflation rates and the growth of average wages across the country. In the case of pensions, for example, the increase is made considering 50% of inflation growth and 50% of average wage growth from the previous year.

4. Legislative regulation. The indexing of payments is regulated by the legislation of Ukraine, and the norms can change depending on the economic situation in the country. 

That is, what is needed for pension recalculation for working pensioners or other groups of citizens is the rise in prices or a significant shift in this precarious balance between citizens’ earnings and rising prices. 

What pension indexing means: annual indexing, usually in March, during which pensions are increased according to official inflation indicators and the growth of average wages. The same provisions apply to working pensioners. 

What indexing social benefits mean: indexing of payments such as child benefits or unemployment benefits is also conducted with consideration of inflation, although the frequency and size of indexing may vary.

The indexing of payments has significant social importance, as it helps maintain the real income level of the population, especially during periods of high inflation, and ensures the stability of the economy.

Annual pension indexing in Ukraine 

In Ukraine, pension indexing is conducted annually, usually on March 1. At least, this was the established order before the war. During the war, the situation may change. Generally, this is a standard date established by legislation, although in some cases indexing may be conducted at other times depending on the economic situation and government decisions.

The main aspects of pension indexing:

1. Calculation formula. Pensions are indexed based on the inflation and average wage growth of the previous year. This formula remains constant each year. However, the value of indexing always changes. This is also a kind of inflation indicator (stability of the exchange rate) and devaluation (some depreciation of the currency). 

2. The main goal is to maintain the purchasing power of pensioners in the face of inflation and rising living costs.

3. Additional indexations. In certain cases, during significant inflation growth or a worsening economic situation, the government may conduct additional pension indexations throughout the year.

There are also some exceptions to this process. In some cases, indexing may be postponed or adjusted depending on the budget and macroeconomic conditions. The war, which has been ongoing in Ukraine for the third year, may also be such a reason. 

In recent years, the Ukrainian government has introduced additional support measures for pensioners, including unscheduled pension increases, especially for the most vulnerable categories of citizens. Some of these benefits are still in place today, although there are certain difficulties with their payment. 

Thus, pension indexing in Ukraine is an important mechanism of social protection that helps maintain the income level of pensioners in the face of rising prices and inflation. It must be conducted every year for the economy to remain relatively stable.