The Reform of the Old-age Pension System and Employer-based Retirement Income Provision: An International Comparison

The 1997 pension reform comprised an increase in contributions, reduction in benefits and introduction of incentives to raise the effective retirement age. But the greatest financial gain was achieved by harmonizing the pension regimes. Measures to promote employer-based retirement income provision, the so-called second pillar, have still to be implemented. Currently, the tax reform committee is discussing tax incentives to raise the utilization of firm and private pension schemes. Abroad, the development of a fully funded pension insurance system is encouraged by a range of tax breaks, which includes deductibility of contributions and lower tax rates on benefits. The most generous system applies in the U.K., where contributions to pension funds as well as benefits are exempt from taxes up to a fixed ceiling. The cost of lost tax revenues is estimated at 3 percent of GDP. In New Zealand, contributions to pension funds have been fully taxed since 1988, but pension payments remain exempt. With this, pension funds were given approximately the same tax status as other private forms of savings. As a result, there was a precipitous decline in firm pension schemes. While developing their capital stock, pension funds are usually exempt from tax on interest earned. In Austria, this exemption is extended only to personal life insurance schemes and Pensionskassen. In spite of similar tax breaks, company pensions show highly varying proportions of coverage against total employment across the countries investigated. Just 11 percent of the dependently employed in Austria are entitled to a firm pension, while in Australia their share is over 90 percent. Generally, firm pensions are widely available in countries where the second pillar is mandatory (Australia, France, Switzerland). In Denmark, the Netherlands and Sweden, firm pensions are similarly prevalent thanks to inter-industrial collective agreements. The incidence of firm pensions depends also on the income replacement rate provided by the public pension system. In countries such as the U.K., Canada or the USA, where public pensions are low, 45 to 59 percent of employees are entitled to a firm pension.