From Generosity to Sustainability - The Austrian Pension System and Options for its Reform

Austria is probably the world.s leader in pension expenditures.not because of its demographic structure but because of the generosity of its pension system. Contributors can obtain 80 percent of the average of their 15 best years of income as a pension, existing pensions have increased until recently along with gross wages, and disability pensions are allowed liberally so that currently half of all men and one quarter of all women who retire do so on a disability pension. As a result, pension expenditures absorb 15 percent of GDP, and contribution rates are among the highest in Europe, even though substantial budget transfers are needed to balance the system. This paper analyzes the institutional setup of the Austrian pension system and its current financial situation. It applies a projection model to forecast the financial situation of the present system as a consequence of the imminent aging of the population. The projections are compared to projections for the G7 countries and Sweden. The results show that the financial situation of the Austrian pension system will worsen relatively swiftly compared with the other countries and.like pension systems in France, Germany, and Italy.become unsustainable in the long run. With little room for raising contribution rates or budget transfers, the system can be made sustainable only by reducing the generosity of benefits and thereby containing expenditures. The paper discusses options for reform. It distinguishes between steps that could be taken immediately.mainly penalizing early retirement; steps that require adjusting key parameters of the system.such as benefit accrual, pension calculation, and annual adjustment; and steps that could be guidelines for further reforms in the medium term.such as increasing the transparency of the system and strengthening the saving function while reducing insurance provsions and hidden redistributory elements.