Labour Market Perspectives and Funding of Old-age Pensions until 2030

In Austria, the discussion of old-age pensions has so far been based on highly pessimistic demographic perspectives and the assumption of a static labour market situation. Whereas the demographic projections for the next 30 years prepared in the second half of the 1990s were starting out from a declining population, more recent projections made by Statistik Austria are assuming a population growth of 3.7 percent. Nevertheless, the ageing of the population will still produce a decline in the working-age population (15 to 64 years) by about 316,000 up to 2030, and in turn will cause a labour shortage, which will substantially accelerate as of the middle of the coming decade and which will make untenable the commonly held assumption that the labour force participation rate will remain unchanged. Such trends are of crucial importance not just for old-age pension systems but also for the labour market. In order to avoid putting a brake on economic growth by a shrinking labour force, it is necessary to take employment policy action which aims at boosting the participation and integration of older women and men in the labour market. Two scenarios have been developed to analyse the effect of labour market trends on the old-age pension systems and to assess the financial situation of the government pension funds for the dependently employed up to 2030. If the activity rate remains unchanged over the next three decades, this translates into a loss of 230,000 workers due to demographic effects. Accordingly, the pensioners-to-contributors ratio (i.e., the number of pensions per 1,000 employment relationships) would rise from 619 in 2000 to 864 in 2030. Whereas currently 85.8 percent of the expenditure for pensions are covered by revenues, this rate would decline to 60.1 percent by 2030 under this scenario of unchanged labour force participation. If we assume that the economic and employment growth rates of the past quarter century (+2.4 percent and +0.4 percent p.a., respectively) will continue into the future, then, based on the latest population projection, labour force participation would rise from 67.6 percent today to 79.9 percent in 2030, thus reaching a level already achieved in the Scandinavian countries today. Accordingly, the pensioners-to-contributors ratio should rise from 619 today to 716 pensions per 1,000 employment relationships in 2030. In their study, Rürup – Schröter (1997) arrived at 980, assuming only a minor rise in the activity rate. Further assuming an average per-capita rise in income of 2 percent in real terms, the contribution margin for pensions would decline to 78.2 percent in 2030. In this scenario, expenditure for pensions by the government funds for dependently employed, would, in terms of GDP, be 11.4 percent in 2030, compared to 8.6 percent of GDP in 2000. The discussion over reforming the pension system has so far focussed almost exclusively on changes in contributions and benefits. This paper concentrates on the labour market, viewing greater labour force participation not just as a major component for further economic growth but also as a crucial factor to stabilise the old-age pension system. Even though the shrinking numbers of working-age persons are expected to improve employment opportunities in the long term, boosting employment will be a critical challenge for economic policy both from a growth perspective and from the point of view of securing old-age pensions.