19 January 1998 • Austria's Old-Age Pension System in an International Comparison • Alois Guger

In all industrialized countries demographic trends necessitate a reform of the provision of retirement income. The rise in the population of pension age relative to the working-age population (the old-age dependency ratio) puts considerable strain on existing public pension systems.

From a demographic perspective, Austria has been in a fair weather period since the mid-1970s. The old-age dependency ratio has been below one third and is set to rise only after the year 2000. The present financing problems result mainly from the unfavorable situation in the labor market: weak employment growth and the implementation of generous early retirement schemes have seriously strained the pension system. Even though the long-term financial situation of the public pension system was markedly improved by the pension reform of 1993, the Austrian pension system remains rather generous in an international comparison: the average net income replacement rate amounts to more than 75 percent of the income earned before retirement for social security pensioners in the private sector. In 1996, more than 15 percent of GDP was spent on the public pension system.

The aging of the population will, however, create long-term financial problems over the next decades: by the year 2030, the old-age dependency ratio will rise from the present rate of 31 percent to over 60 percent; the number of persons of retirement age will surge by more than 70 percent, but the working-age population will shrink by 12 percent. To safeguard the long-term financing of the public pension system, three options are available: higher contributions to the pension system, a higher age of retirement, and higher funding of the pension system from general tax revenues.

According to the calculations carried out by the EU Commission, Austria would have to raise the contributions to the pension system by more than 50 percent, or raise the retirement age by 11 years, or lower the net-income replacement rate by 45 percent in order to offset the demographic trend. Professor Rürup, in a study commissioned by the Ministry of Labor, Health and Social Affairs, reaches similar conclusions: the implicit contributions to the public pension system (financing without recourse to general tax revenues) would have to rise by about 60 percent. Of course, only a combination of all these measures is feasible and meaningful.

International competitive pressures sharply limit the extent to which contributions to the pension system can be raised; the financing of the pension system by general tax revenues is limited by the need to consolidate the Federal budget. Therefore, the reform proposals of the Federal government, which aim at maintaining the present system and its guiding principle of preserving the living standard of the population after retirement, concentrate on measures which raise the very low retirement age and lower the relatively high net-income replacement ratio.

The length of the period during which a retirement income is drawn as well as the replacement ratio can be changed only slowly for the pensioners on average. These reform measures, for purposes of fairness, can only be introduced gradually, and must be implemented now if they are to become effective around the year 2015 when the problems caused by the aging of the population become ever more serious.

Given the low retirement age and the high replacement ratio in an international comparison, Austria's pension system offers enough maneuvering room for putting the system on a sustainable financial basis. Large differences exist, however, between the various systems operating in Austria; benefits vary greatly by income level, and a reduction in the replacement ratio may push some persons with low income below the poverty line.

The proposed structural reforms of the public pension system may be complemented by employment and education policies, in particularly those targeted toward older employees; as far as income policies are concerned, a weakening of the seniority principle might help to alleviate some of the present problems