Controversy over government’s pensions harmonisation plans

In September 2004, a year or so after the introduction of a far-reaching pensions reform providing for considerable cuts in state pensions, the Austrian government presented a draft bill on the harmonisation of the various pensions systems for different occupational groups. Whereas the conservative-populist coalition government sees its planned pensions harmonisation as being fair to all the working people concerned, organised labour and the parliamentary opposition consider that these plans consolidate the 2003 welfare cuts rather than lessen their effects.

Spring 2003 saw a series of strikes and protest actions directed against the government’s plans to introduce a far-reaching state pensions reform (AT0306201N), which was eventually endorsed by parliament on 11 June 2003, though in a slightly modified form compared with the original draft. Contrary to Austria’s tradition of intense social partner involvement in important social policy matters, a social partners' joint initiative to find an alternative to the government’s reform proposals was not taken up by the latter (AT0305202F). However, the strike actions mainly organised by the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) - which were the most far-reaching such protests Austria has experienced since the Second World War, with hundreds of thousands of employees participating (AT0401203F) - did have an impact: although the pensions reform passed by parliament entails substantial welfare cuts for future beneficiaries, organised labour managed to achieve some mitigation of the original draft, in particular an overall ceiling of 10% on the pension losses resulting from the reform. Moreover, in an effort to forestall further protest actions, the coalition government of the conservative People’s Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) announced that the various pension systems for different occupational groups would be harmonised by the end of 2003, as demanded by the trade unions.

Key points of 2003 pensions reform

The key points of the pensions reform as endorsed by parliament on 11 June 2003 corresponded largely to the government’s original draft proposal presented in March 2003 (AT0305201N), despite some modifications. The 2003 pensions reform provides for:

  • the abolition from 1 January 2004 of the former early retirement scheme due to unemployment. This provided the possibility for women to retire at the age of 56.5 and for men at the age of 61.5, if during the 15 months immediately preceding retirement age they became unemployed;
  • the staged abolition between July 2004 and April 2014 of the early retirement scheme - again enabling women to retire at the age of 56.5 and men at the age of 61.5 - based on a long social insurance record of at least 35 contribution years or 37.5 insurance years;
  • a staged reduction of the 'increment' points awarded for every year of pension insurance contributions, from 2% to 1.78% in over 2004 to 2009. By the end of the process in 2009, entitlement to a pension of 80% of pensionable earnings will be achieved after 45 years of contributions, instead of the previous 40;
  • an increased reduction from January 2004 in the pensions awarded to early retirees (compared with the 'normal' retirement pension at the age of 65 for men and 60 for women), with the reduction rising from 3.75% to 4.2% per year of early retirement;
  • a staged extension of the period of earnings on whose basis pension benefits are calculated, from the previous 15 to 18 best-paid working years (depending on circumstances) to 40 years. This process began in 2004, with each subsequent year extending the calculation period by one year;
  • a limitation of the possible overall losses in pension benefits for each individual retiree resulting from the pensions reform, set at a maximum of 10% in relation to the benefits provided by the previous scheme; and
  • the introduction of a special fund for 'hardship compensation', with EUR 10 million of funding in 2004, aimed at subsidising those retirees who are threatened by poverty owing to the pensions reform.

Government’s pension harmonisation plans

Contrary to its previous announcements, the ÖVP-FPÖ government did not harmonise the different pensions systems for private sector employees, public servants, farmers and self-employed people during 2003. This is because the government on the one hand and the social partners on the other failed to reach an agreement over a harmonised pensions system for all occupational group, despite some 20 rounds of negotiations between autumn 2003 and summer 2004. Consequently, on 7 September 2004 the government presented a draft bill on a harmonised pensions system which had been drawn up exclusively by government experts. The key issues in this draft bill (which partially modifies the 2003 pension amendments) include the following:

  • the introduction of a contribution-based, individual 'pensions account' (Pensionskonto) for each working person, granting at the age of 65 a pension of 80% of pensionable earnings, calculated on a period of 45 years' contributions (known as the '45-65-80 scheme'). Any deviations from this 'normal' scheme in terms of age and/or contribution years entail cuts in pension benefits, or - in a few cases - additional benefits;
  • a revaluation of (previous and future) periods of pensionable earnings due to a more favourable adjustment of (former) pension insurance contributions in line with real wage developments. Moreover, future state pensions will be appropriately adjusted to inflation;
  • the introduction of a single maximum limit on earnings liable to social insurance contributions (Bemessungsgrundlage) for all economically active people, instead of the current differing limits (or a lack of any limit in some cases) for various categories of people;
  • the consideration of 'waiting periods' (Ersatzzeiten) - eg periods of unemployment or sickness and periods used for childcare or training purposes - as pension contribution periods, even though at a lower rate than 'normal' contribution periods based on regular earnings;
  • the introduction of a 'parallel account' (Parallelrechnung) for all active people, as from 1 January 2005. This means that for all people with a legal entitlement to state pensions who have not yet reached the age of 50 on 1 January 2005, their entitlement will be calculated on the basis of both the 'old' and the 'new' scheme, in line with the proportions of their working life periods spent before and after this date;
  • the introduction of a 'corridor' of pension entitlement (Pensionskorridor) between the age of 62 and 68. This scheme initially applies only to men since the retirement (pensionable) age for women is still 60, and will gradually be increased to 65 between 2024 and 2033. This special scheme will be the only possibility for men to opt for retirement before the age of 65, since the previous early retirement scheme was abolished by the 2003 reform (see above). However, since each year of early retirement entails a reduction of 4.2% in the pension awarded (on the basis of the '45-65-80 scheme'), this option may bring reductions in pension benefits of up to 12.6% - irrespective of any additional losses caused by the 2003 reform;
  • amendment of the current regulations applying to 'heavy workers', with the effect that this group of employees (to be defined by decree by the Minister of Social Affairs) may opt for early retirement, with each year of 'heavy work' allowing three months to be deducted from the regular retirement age of 65. This scheme also applies to men only, since the minimum age for this kind of early retirement is fixed at 60. Moreover, a worker has to have 45 years of insurance and 15 years of 'heavy work' to benefit from the scheme. Further, a cut in cash benefits of 3% per year of early retirement has been stipulated by the government; and
  • reassessment of the levels of pension insurance contribution for all occupational groups. Although the contribution levels will converge, there will still be considerable differences between those paid by the self-employed, farmers and private sector employees (17.5%, 15.0% and 22.8% of pay, respectively).

Responses

Whereas the government has praised its draft pension harmonisation bill as being fair to all occupational groups concerned, organised labour has criticised key points of the planned reform. According to ÖGB and the Chamber of Labour (Arbeiterkammer, AK), private sector employees are discriminated against by the government’s harmonisation plans, since they will continue to pay considerably higher pension contributions than the other occupational groups. Thus, the reform planned by the government is considered to be far from realising the principle of equal payment for equal benefits for all insured people. Furthermore, organised labour points to the fact that female employees will be excluded from virtually any entitlement to use early retirement. Therefore, representatives of the ÖGB women’s organisation are urging the government to introduce an early retirement option for women, analogous to that planned for men. Moreover, they demand that periods off work through childcare obligations should be more favourably assessed towards the future 'pensions account', in order to compensate for major cuts in pension benefits caused to women by the 2003 reform. Apart from this, both ÖGB and AK criticise the fact that the planned pensions harmonisation will apply only to people younger than 50 on 1 January 2005 - with the result that about 700,000 active people (more than 18% of the total) remain outside the scope of the reform. Moreover, the planned harmonisation will cover only career public servants employed at federal level, excluding those employed at regional (Länder) level. For all these reasons, organised labour argues, the pensions harmonisation designed by the government is fragmentary and unfair.

In general, the two parliamentary opposition parties, the Social Democratic Party (Sozialdemokratische Partei Österreichs, SPÖ) and the Greens (Die Grünen, GRÜNE), share the views and criticisms of organised labour. Representatives of both parties have admitted that a more favourable revaluation of compensatory credits for time spent out of work/employment for childcare and nursing as 'pensionable time', such as planned by the draft harmonisation law, would be an improvement in the legal situation, in particular for women. The same is true of the planned revaluation of former contribution periods. However, the parties argue that these advances fail to compensate for losses in cash benefits that result from the extension of the period of earnings used to calculate the pension, from the current 15-18 'best' working years to virtually the whole of the person’s working life. This new, extended calculation basis will hit women especially hard, since they are often engaged in part-time work and frequently have a record of contribution periods interrupted by periods spent out of work. In order to prevent extremely low pension benefits due to a lack of sufficient 'pensionable time', the GRÜNE have repeatedly demanded the introduction of a common basic pension insurance system providing minimum cash benefits for all people regardless of whether they have a record of pensionable employment (AT0301203F). This corresponds with the demands put forward by an 'interest platform to combat poverty' (Armutskonferenz), which also calls for accompanying measures in terms of active labour market policy as well as the supply of public social services.

Commentary

According to the ÖVP-FPÖ government, the 2003 reform (aimed at making significant cuts in public pensions) was designed to secure the sustainability of the state pensions system, whereas the new 2004 harmonisation plans are designed to establish a uniform pensions system that is just and fair to all occupational groups. According to organised labour, these goals may be questioned, since: many retirees will hardly be able to subsist if there are substantial cuts in cash pension benefits; and a real harmonisation of pensions systems is not in sight due to the planned unequal levels of pension insurance contribution for the different occupational groups. Both ÖGB and AK oppose the government’s harmonisation plans, believing that they consolidate the welfare cuts introduced by the 2003 reform rather than mitigate them. This view is supported by calculations conducted by Christine Mayrhuber, an associate of the Austrian Institute of Economic Research (Österreichisches Institut für Wirtschaftsforschung, WIFO), which find that there will be losses in cash benefits for female employees under the new, 'harmonised' scheme of up to 14% in comparison with the 'old' scheme, given the same curricula vitae.

Most experts agree that the draft harmonisation reform contains a series of promising efforts to bring convergence in the different, unequal pensions systems for different occupational groups on the one hand, and to compensate for losses in pension benefits caused by the 2003 reform on the other hand. However, many regard these efforts as being far too little. As AK and WIFO have proved by calculating examples of specific cases, the 2003 pensions reform in combination with the planned 2004 pensions harmonisation will bring 'pauperisation effects' for parts of the older population (especially women), in particular for those who are dependent on statutory pension benefits.

Despite the fact that the government has not met the trade unions’ demands in drafting the harmonisation plans, the latter do not seem willing to organise further protest actions like those in 2003, even if the draft bill is passed by parliament in autumn 2004 as scheduled. (Georg Adam, University of Vienna)

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