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Pension Reform and Retirement Incentives: Evidence from Austria Print E-mail
bridges vol. 19, October 2008  /  OpEds & Commentaries

 By Roman Raab

The following commentary by the Austrian economist Roman Raab is based on his dissertation, Pension Reform and Retirement Incentives: Evidence from Austria, [available from http://etd.gsu.edu/theses/available/etd-07312008-120625/ ]. From 2003 to 2008, Raab worked as research assistant in the Department of Economics at Georgia State University. He completed his dissertation in August 2008.

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Roman Raab
Over the past decades, retirement systems in both Europe and North America have become heavily discussed issues in the political debate. Looking at Austria, it appears to be a country full of disability pensioners and early retirees. Important reforms begun in the 1990s have so far only partially repaired the weaknesses of the relatively expensive public pension system for private sector employees (ASVG). In the long term, an aging society will run into a situation in which old-age income security could potentially collapse, unless the whole system adapts to the new circumstances of an increasingly aging population. One possible scenario for reform is an increase in the penalty for early retirement; however, more problematic scenarios include an increase in the retirement eligibility ages, an increase in social security contribution rates, a decrease of benefits, and an increase in immigration. Some major issues of the current Austrian pension system identified in my research are financial incentives facilitating early retirement, the very generous granting of disability pensions, the different retirement regulations for males and females, and the almost singular source of old- age income (only about 9 percent of employees are eligible for company pensions as a second pillar of retirement income).


Pension systems in a nutshell: fully funded vs. pay-as-you-go pension systems

 Retirement pension plans are mandatory or non-mandatory savings accumulated for a person’s retirement period. In general, there are two types of pension plans, fully funded or pay-as-you-go systems.
In fully funded systems, a person saves an amount of money during his employment period in an individual account. The person receives this amount of money as an annuity once he retires. In a pay-as-you-go system, the generation currently at work pays for the retirement benefits of the generation currently retired. The major disadvantage of a fully funded system is the risk of uncertain return on the assets invested in the financial market. One might not receive the annuity desired due to returns lower than expected. The annuity depends on the overall economic situation, as well as on the degree of risk implied in a pension fund portfolio.
In contrast, a pay-as-you-go system is less risky but its returns depend strongly on the ratio of working to retired population. In an increasingly aging population, as it is the case in most OECD countries, the finances of a pay-as-you-go system are increasingly threatened by an exploding proportion of people in retirement. Therefore, government often increases social security contributions of the generation at work in order to keep the intergenerational finances in balance.
Many countries rely on a two- or three- pillar retirement system. Usually, the first pillar is a pay-as-you-go pension plan. The second pillar provides a fully funded pension. Often, there are also employers’ pension plans that complement the first two pillars. The US is a country in which retirees receive portions of their pension from three or even more pillars.
 
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