2 May 2001 • Labour Force Participation and Public Pension System • Alois Guger, Christine Mayrhuber

The European Commission has in recent years stressed the importance of increasing labour force participation in Europe, in order to curb the old-age dependency rates in spite of demographic ageing.

Like elsewhere, changes in the demographic framework and the labour market have a direct impact on the public pension insurance system in Austria. The labour market thus provides the focus from which obvious structural effects in the system can and should be countered, because labour is expected to be in shorter supply over the coming decades. So there are several signs to indicate that labour market trends can put a brake to the rise in the pension dependency ratio. For labour market policies, there are opportunities offered by three factors:

• the decline in the number of people of working age (15 to 64) improves opportunities for women and older people on the labour market;

• demand for labour is expected to continue to grow over the next three decades;

• according to current law, harmonisation of the early retirement age will be completed by 2027 and of the standard retirement age (65 for men and women) is scheduled to be completed by 2033.

These developments may be used to improve the integration of women, and in particular older workers, in the labour market, provided that appropriate accompanying measures are taken (better reconciliation of job and family, internal training of older workers, etc.).

If participation of older workers and women were to be raised, this would have effects at several levels of the social transfers system: it acts positively on the income situation, on revenues for the pension insurance organisations and on the level of pensions. It reduces expenditure for passive labour market policies and it checks the pension dependency ratio.

These interactions between the labour market and the pension dependency ratio were described in three scenarios. If the status quo of labour force participation were to continue at the level of 1999 (a highly unlikely event), the pension dependency ratio would rise to 889 pensions per 1,000 employment relationships subject to pension insurance. If the labour force were to grow for the next decades at more or less the same rate as in the past three decades (the base scenario), the pension dependency ratio would rise moderately, to 766. If, however, the Austrian participation rate should rise, by 2030, to today's level in Norway, the pension dependency ratio would rise to just 782.

The discussion on pension reforms concentrates on parametric changes in the pension system. However, any long-term financial sustainability of old-age provision is not solely determined by the pension laws, but is also affected by the economic environment and in particular the labour market. The higher the employment level, the higher will be the number of contributors and the lower the pension dependency ratio. The level of participation therefore is a key factor for sustainability of the pension systems – and it is an interaction which has moved to the foreground of employment policies also at a European level.