pensions, with ceilings and floors equal to the change in the cpi + 0. 50 % and 0. 25 %, respectively. on the projections available, in macroeconomic scenarios that are fairly favourable in terms of employment and productivity developments, and in which inflation stands at close to 2 %, the recent reforms ( i. e. putting back the retirement age, a sustainability factor and a new revaluation mechanism ) would manage to counter the effect of the expected increase in the dependency ratio on pension spending and, therefore, would succeed in restoring the system ’ s financial sustainability in the long term. assuming no new revenue sources, the adjustment mechanism would operate through reductions in the replacement rate, which would need to be significant to stabilise the system ’ s spending. the most effective mechanism is the revaluation index, the application of which, in the current model, leads to below - inflation increases in existing pensions insofar as revenue and expenditure are not in equilibrium. evidently, more favourable scenarios in demographic or employment terms allow the sustainability of the system to be achieved with fewer reductions in the replacement rate. but even in highly optimistic scenarios, the reduction needed in that rate to ensure the system ’ s sustainability would be considerable. what is the main conclusion to be drawn from this analysis? since the challenge posed by the impact of demographic trends is to ensure the financial sustainability of the public pension system, even once full employment has been reached, there are, in fact, only two 4 / 6 options to achieve this : 1 ) to reduce the pension replacement rate, and / or 2 ) to broaden the sources of funding. given the magnitude of the problem, it would seem reasonable to consider both options. 1 ) with respect to the measures to curb expenditure through the replacement rate, the desirability of a more balanced distribution between a ) the adjustment arising from the reduction in the initial pension, and b ) that operating via the indexation mechanisms, should be studied. the option to further push back the retirement age may also be considered, since it could be justified by people ’ s longer life expectancy, their joining the workforce later, the reduced physical demands of most jobs today, and people ’ s better health at more advanced ages. in this regard, any measures that discourage early retirement and allow people to extend their working lives beyond the age of 67 would have a positive bearing on the financial sustainability of the system. some countries have opted to build in an automatic link between life expectancy and

the sufficiency of future pensions and allow individuals to make optimal saving decisions. lastly, the challenges of population ageing must be tackled by means of a broad economic policy strategy. it is vital here that the path of fiscal consolidation should be resumed and that the public debt should return to a downward trend, so as to better position public finances to address the issues arising from ageing. the sustainability problems of the pension system may indeed be alleviated if employment and productivity in the economy trend favourably. in this respect, there is much room for improvement in the goods and services markets, in education and employee training, and in the labour market too. 6 / 6