Redistribution and Contribution Equivalence Austrian Old Age Security

The public pension system in Austria redistributes 15 percent of the gross domestic product within a pay-as-you-go-system to retirees. The extent of money transfers is not only determined by the systems gradual maturity but also by exogenous factors like demographic change, more volatile job relations and adjusting participation rates of the labour force. In a pay-as-you-go-system this generates financial pressure and finally shifts the redistribution pattern between generations. Austria's pension system is income based and designed to protect the retiree's living standard. Early pension reforms until the mid 1980's concentrated on increasing contribution rates. Negative labour market effects from high wedges between net and gross wages forced more recent reforms to stress actuarial measures, thereby redesigning the systems towards a more contribution based system. The main group at which financial cuts were targeted are future retirees. This is in line with international experience on pension reforms. The pension reform of 1997 harmonised the increments used to calculate new pensions at 2 percent for each insurance year. The maximum retirement pension (80 percent of the basis of assessment) can thus be obtained after 40 insurance years. At the same time, a system of actuarial discounts was introduced as a first attempt to raise the retirement age: each year of retirement before the regular retirement age (60 for women, 65 for men) makes for a reduction of 2 percent from the base of assessment. The reduction was capped in order to avoid hardships. Both reforms entered into force at the start of 2000, thereby strengthening the insurance principle of the retirement pension. As a further incentive to retire later, the period for calculating the basis of assessment for early retirement will be gradually extended to 18 years, starting in 2003. The transition phase will not be completed until 2020. The delayed effectiveness of the 1997 reform means that it does not yet have any visible financial effect on the federal contribution to the pension insurance schemes. Actually, the actuarial discounts currently produce a counter-incentive, speeding up early retirement. The retirement age for direct pensions nevertheless did not vary much over the past years. Average figures thus do not show a rush towards early retirement. The pension reform 2000 is characterised by budgetary consolidation efforts of the federal government. The financially most important part reduces the attractiveness of early retirement schemes by raising the discount to 3 percent per year and the minimum age for early retirement to 56½ and 61½ years, respectively. By relying on more rigorous admission criteria the government makes shure to achieve financial targets at the cost of formulating actuarial correct discounts and by restricting the possibility of individual choice with respect to the retirement age.