By international and European standards, the Austrian public pensions insurance system, which protects insured people and their surviving spouses and children against the risks of old age, invalidity and death, is widely deemed to be stable and efficient. It is based on a 'pay as you go' mechanism (Umlageverfahren) which means that the cash benefits payable to retired, disabled and widowed people are met from the taxes and contributions paid by the active working population. This 'inter-generational agreement' based on solidarity between younger with the older people has proved efficient in terms of maintaining living standards for older people and still represents more than 90% of overall pension provision in Austria. Accordingly, the share of occupational pension schemes (the 'second pillar') and of individual private life and pension insurance schemes (the 'third pillar') is still relatively low.
In December 2002, a report examining the future financing of Austria's public pensions system was presented by a special commission established by the government. This report questions the sustainability of the present level of statutory pensions, and thus proposes a longer working life and cutbacks in cash benefits. These proposals have been strongly criticised by the parliamentary opposition and the trade unions.
By international and European standards, the Austrian public pensions insurance system, which protects insured people and their surviving spouses and children against the risks of old age, invalidity and death, is widely deemed to be stable and efficient. It is based on a 'pay as you go' mechanism (Umlageverfahren) which means that the cash benefits payable to retired, disabled and widowed people are met from the taxes and contributions paid by the active working population. This 'inter-generational agreement' based on solidarity between younger with the older people has proved efficient in terms of maintaining living standards for older people and still represents more than 90% of overall pension provision in Austria. Accordingly, the share of occupational pension schemes (the 'second pillar') and of individual private life and pension insurance schemes (the 'third pillar') is still relatively low.
However, the state budget is under considerable pressure and unfavourable demographic developments mean that there is an increasing number of retired people and a decreasing number of active employees. Hence, the future possibilities of financing the existing public pensions system have been questioned by both politicians and experts since the mid-1990s. Although dramatic demographic scenarios predicting almost a 1:1 ratio between active workers and retired people by 2050 are now considered by experts to be obsolete, 'neo-liberal' thinking questioning the present welfare state, along with an active marketing strategy by private insurance companies, have exerted a lasting influence on public opinion. Accordingly, the statutory pensions scheme is widely regarded as no longer being secure.
In line with this approach, the coalition government of the conservative People’s Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) which was in power from early 2000 to late 2002 took initiatives to supplement the public pensions system with occupational and private pension schemes. The new severance pay legislation, for example, which was passed by parliament in June 2002, is designed to establish a system of occupational pensions by introducing special funds to administer and invest severance pay contributions towards a future pension (AT0211203F). In September 2002, the government introduced a 'premium' scheme for a new form of private pension insurance to be offered by banking and insurance companies, providing premium payments by the state of 10% of the money invested, up to EUR 180 annually.
Commission’s report
On 12 December 2002, a pensions reform commission set up by the government presented its proposals for an overhaul of the current statutory pensions scheme in order to maintain its sustainability. Arguing that a financial gap will emerge due to unfavourable demographic developments, the commission recommends cutbacks in the invalidity pensions scheme by establishing a system of graduation in payment with respect to the scale of invalidity, instead of the current 'all or nothing' scheme.
Furthermore, the commission states that the current average level of cash benefits under the normal statutory retirement pension, and in particular under the early retirement scheme, is too high. In order to ease the state’s burden in terms of old-age pension provision, the commission calls for an extension of the period of earnings used to calculate the pension from the current 15 or 18 working years in which the person's earning were highest, to the whole of the person's working life. Moreover, the commission proposes to reduce the 'increment points' awarded for every 12 months of pension insurance contributions from two to 1.7, which would means that with 40 years of contributions the pension would not longer amount to 80% of pensionable earnings, but only to 68%.
Other proposed cutbacks concern the very attractive early retirement pension, which can easily be claimed at the age of 56.5 by women and of 61.5 by men. As a consequence, the number of people who retire early is much higher than the number of employees who actually attain the statutory retirement age of 60 (women) and 65 (men). The commission proposes to lower the level of early retirement pensions by suggesting a cut of 3% per year of early retirement in the cash benefits provided under the normal pension.
It is proposed that the (currently lower) average and statutory retirement ages for women should converge towards those of men at a higher overall level. Compensatory credits for time spent out of employment for childcare and nursing should be awarded as 'pensionable time' on a larger scale than under the present scheme. Periods of unemployment – even when no unemployment benefit can be claimed because a spouse's earnings are too high – should be counted as contribution periods for pension insurance. This is because the most serious problem for many older women is a lack of sufficient pensionable time in paid employment.
Reactions
Immediately after the pensions reform commission presented its report on 12 December 2002, Martin Bartenstein, the ÖVP Minister of Economic and Labour Affairs in the current caretaker government (no new coalition has yet been formed after the elections in November 2002), emphasised his willingness to implement the commission’s main proposals as soon as possible. In particular, a phased increase of the age of early retirement to the normal retirement age from 2004 onwards should – finally – result in the abolition of the early retirement pension scheme by 2009. To keep older employees in a standard employment relationship until 60 (women) and 65 (men), incentives for employers, such as considerable reductions in non-wage labour costs for employees older than 55, should be given.
However, both parties currently in opposition, the Social Democratic Party (Sozialdemokratische Partei Österreichs, SPÖ) and the Greens (Die Grünen, GRÜNE), have rejected most of the proposals of the reform commission. Alfred Gusenbauer, the chair of the SPÖ, stated that the planned extension of the period for determining pensionable earnings to the whole active working life will further discriminate against women because they are much more often engaged in part-time work, which will be reflected in lower pension benefits. Furthermore, the SPÖ opposes the planned abolition of the early retirement pension scheme. The argument is that this measure will cause a significant increase in unemployment among older employees, because the government does not intend to accompany the initiative with an active labour market policy for older people. In addition, the Greens have stated that the commission did not consider a possible common basic pensions insurance providing minimum cash benefits for all people regardless of whether they have a record of pensionable employment.
The Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) has strongly denied the supposed necessity of such reforms and has announced serious resistance in the event of their realisation. The planned reduction in average pension benefits is considered a substantial threat to the public pensions system. The unions believe that welfare cutbacks in the statutory pensions scheme are probably devised to urge (insufficiently) insured people to take out supplementary private pensions insurance.
In particular, the women’s organisation within ÖGB has demanded a more effective public pensions insurance system with respect to women’s protection against 'pauperisation' in old age.
Commentary
The message of the commission’s report is clear: In the future, all insured people will have to work for a longer time, but will receive smaller pension benefits. The commission denies the sustainability of the present level of statutory pensions, and refers to supplementary provision by the private insurance market. However, experts warn that the public pensions system will be marginalised rather than supplemented by occupational or private pension insurance schemes. This will probably be a serious problem for those who are dependent on statutory pension benefits and cannot afford an – anyway more risky – private pension. (Georg Adam, University of Vienna)
Eurofound recommends citing this publication in the following way.
Eurofound (2003), Pensions reform report provokes controversy, article.
