Pension reform plans under debate

With its medium-term viability thrown in question, Austria's pension insurance system has become the focus of a reform effort, which is due to be completed in November 1997. The main proposals for long-term viability are a moderate reduction of pension levels and a raising of the average retirement age. Raising contributions is regarded with caution.

Pensions in the Austrian private sector are financed under a "pay-as-you-go" system, with 22.75% of the total wage cost being contributed to the national pension insurance schemes. Pensions cost nearly 15% of Austrian GDP, compared with between 9% and 12% in most member states of the EU, and close to 20% of private sector pension cost is financed from the federal budget. There is broad agreement among experts that the Austrian pension system is relatively generous. Average pensions, according to the Government, are ATS 11,000 per month for former employees, and ATS 32,000 per month for former federal civil servants. Local government civil servants are estimated to receive average monthly pensions of ATS 24,000. Austrian pensions amount to 80% of the average contributions over a person's best 15 years' earnings, if they have worked for at least 35 years, in the case of men, or 30 years, in the case of women. Where people have worked for under 35 or 30 years, there are deductions for every year under this figure. Men have to be at least 60 and women at least 55 to qualify for early retirement, except in cases of disability, while the normal retirement age is 60 for women and 65 for men.

Basic options

After some debate, the government has definitely ruled out a shift from the compulsory national insurance system for pensions to a mere obligation to be insured. It has also ruled out a shift from the "pay-as-you-go" system (under which present pensions are paid from current contributions) to pension funds or personal financing. Company occupational pension funds were also an option being debated, as a way to take the pressure off the national state pension system. Currently only 4% of employees are involved in company pension schemes, although the trend is rising. One proposal was to lower contributions to the national scheme in order to free funds for company pensions. There was also a suggestion by the secretary general of the Austrian Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ) - immediately opposed by the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) - to create and finance company pension funds by splitting future wage increases into a wage and a contribution element.

Pay-as-you-go options

Given the commitment to the pay-as-you-go national pension scheme, a secondary set of five options remain, which are outlined below. The deadline for formulating these reforms has tentatively been set for 7 November 1997. One week later Parliament is to debate and pass the 1998 and 1999 budget. Short-term measures will be agreed before 24 July, when the budget will first be presented in Parliament.

(1) Lengthening the contribution period relative to benefit period

Only about 38% of Austrian men between the ages of 55 and 64 are economically active. The average age of new pensioners stands at 58.2 for men and 56.7 for women. Men now spend on average over 15 years in retirement, and women more than 23 years. There are now over 960,000 pensioners over the normal pension age, 204,000 early retirees, and 388,000 disability pensioners. After initial steps to halt the decline of the average retirement age were taken in 1996, it seems likely that substantial disincentives to early retirement will now be introduced. One option is to reduce pension levels by 2% for each year below the normal retirement age, a measure that has already proved its effectiveness in civil service pensions. Another approach might be to give greater weight to income in later relative to earlier years, as an incentive for people to stretch their working lives. A panel of experts convened by the Ministry of Labour proposed not to limit measures to raising the average pension age, but in addition to raise the age of pension eligibility by one year, from 60 to 61 for women and from 65 to 66 for men. The Government seems little inclined to act on this.

The legal retirement age for women is 60. In 1993, a law was passed raising it to 65 between 2018 and 2032. Current proposals by experts and employers emphasise a need to bring the latter date forward to 2005 at the latest. Trade unions, women's organisations and the Government itself are opposed, arguing that a change at this time would amount to a serious breach of confidence.

If measures could be taken to halt and reverse the trend for young people to enter the labour force ever later, this would also help to stabilise the contributor base. An effort to streamline university curricula, long under debate, is thus likely to receive new impetus.

(2) Broadening the contributor base

It is certain that the contributor base for the pension system will be broadened to include all incomes. Freelancers and those in minor employment - employment of, in practice, under 12 hours per week - will also have to contribute. On the other hand, they will then also earn an entitlement. How this will work out for the pension system in the longer term is uncertain.

(3) Raising contributions

By way of a short-term measure, pension contributions may be raised, but not across the board. Only gross incomes above ATS 41,400 per month would be affected. One automatic result would be lower income tax revenues - ie part of the money raised this way would in reality come from the federal budget rather than the contributors. In the longer term, there appear to be no plans to raise contributions.

(4) Reduce benefits

One measure - increasing pensions by less than inflation - was resorted to repeatedly in the past. However, the Government has stated its intention to raise pensions, presumably in real terms, in 1998 and 1999, though it has also said that increased life expectancy should be taken into account. At first, it wanted to use this argument as a justification for raising the level of contributions, but an expert proposal has since shifted the emphasis to lower pension entitlements. This would be achieved by lengthening the base period on which the amount of pension is computed from the best 15 years' earnings to the best 20. This measure would disproportionately affect women and is therefore to be flanked by compensatory regulations.

(5) Reduce the costs of administration

There are 28 pension insurance corporations, none of them privately owned. Savings might be made by merging some of them. This would reduce duplication of effort, cut staffing and raise productivity. As an alternative, closer cooperation in sharing resources, especially in training and data processing, tied in with more specialisation by each service provider, has been offered.

Commentary

The intended reforms do not alter the system as such. With their emphasis on increasing the number of contribution years relative to benefit years they are, however, a clear reversal of policies at the heart of combating unemployment over the past 15 or 20 years. This is likely to be the main reason for the opposition the ÖGB has expressed against penalties on early retirement. While the trade unions are clearly in favour of maintaining pensions, they fear that measures to lengthen working life will further increase the glut in the labour market. In the past, the ÖGB was always among the most vocal proponents of lowering the effective pension age and of postponing the labour market entry of young people.

The social partners are taking rather divergent views of the reforms needed. Employers' organisations have expressed preferences, first for a shift to company pension funds, and later for measures lengthening working life. Both of these preferences appear to make sense to employers regardless of any need to sustain the pension system. The trade unions, on the other hand, have repeatedly made clear that a 20% contribution from the federal budget is much less than they regard as acceptable and fair. They have put forth 33% as "a guideline", since this was the budget contribution envisaged when the current system was first created. Their aim in the reform effort appears to be foremost an examination and repair of the redistributive features of the system, as well as a defence against any real pension cuts. Both parties, however, are careful to appear reasonable and open for constructive debate and compromise.

At this point in the reform effort, not all the possible unintended side effects have been discussed. For instance, streamlining study courses and at the same time eroding the differences between regular employment and freelancing may result in making young people more willing to enter into precarious forms of employment. (August Gächter, IHS)

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