When the Austrian government ratified its controversial pension reform bill last year, the unprecedented reaction (including the largest strike seen in Austria since World War II) suggested that Chancellor Wolfgang Schüssel might be storing up political problems for the future.
Austria remains one of Europe’s most generous first-pillar pension providers with workers often expecting and receiving up to 80% of salary from the state.
The largesse of the system in comparison to some of its European neighbours – notably Germany where the government has been reducing state provision in recent years – is attributed by many in the country to the ‘Austrian soul’, which expects life to begin at 55. Early retirement is what many Austrians work towards and the grey lobby is difficult for any government to upset.
With a rapidly ageing population and a demographic profile that suggests by 2050 Austria could be facing a balance of one worker for every retiree, the government was clear that adjustment of the system to eliminate early retirement and rebalance the pensions calculation basis for pensions was necessary.
To this end, the age of retirement for men will increase from 61.5 years to 65 years, and the age of retirement for women from 56.5 years to 60 years. The changes are to be introduced gradually from July this year to 2013.
Additionally, Austrians that decide to retire early will be hit by reductions in their gross pensionable income increased to 4.2% from the current 3.75%, with early retirement being abolished by 2013.
Gerhard Buczolich, director of international social insurance and technical co-operation at the Federal Ministry of Social Security Generations and Consumer Protection in Vienna, explains that the present Austrian state regime was based on a calculation of the best 15 years of income.
The government reforms, he adds, aim to stretch the pension calculation gradually to a career basis of 40 years of social insurance payments.
“We are now gradually extending the assessment period from 15 years from the end of last year up to 40 in 2028, so that it increases one per cent per annum.”
He notes that there will be special arrangements for mothers to ensure that they can make adequate provision over their working lives.
And he adds that the government has stipulated that any losses to pension rights compared to the former system of calculation should not exceed 10%.
“If the losses were in the order of 20-30% then there could be serious social effects.”
While Buczolich concedes that the reforms weren’t popular with the Austrian public, he believes that there was little real political block on the new legislation.
“In principle the other parties were convinced that some reform was needed although they held back from making any overt statements. There was no long-term damage to the government though and few people are making noises about this now.”
As he notes, the net substitution rate for Austrian pensions remains high: “After 40 years of employment you can still have 80% of salary as a pension.
“Austrian pensions are generous and it is not necessary for people to have other pensions, although they can if they want to improve standards.”
Furthermore, a review of the reforms by the OECD, he adds, states that in principle the reform should reinforce the system in the long run.
In November last year the International Monetary Fund (IMF) also said the law would boost the country’s long-term fiscal sustainability.
However, the support was not unqualified.
Both the IMF and the European Commission questioned the viability of the 10% cap on pension reductions, pointing out that there could be a number of “undesirable effects” through the cap - for example, severing the notional link between contributions and benefits.
Closer to home, Buczolic says that Austrian professor Robert Holzmann, the World Bank’s pensions specialist, recently criticised the lack of privatisation in the Austrian reforms: “We addressed the comments with the response that criticisms often don’t take into account the tax reductions on contributions to 2nd and 3rd pillar pensions in other countries.”
“The Austrian government is working hard on the question of demographic problems, which you have both in public as well as private schemes, by, for example, increasing the labour force participation rate.
“The statistic of one worker for one retiree in 2050 is still a long time away and there is time for some long-term changes before then.”
Fritz Janda, managing director at the Vienna-based Austrian Association of Pensionskassen, agrees that the system is in good shape for its beneficiaries: “I have friends in Germany who say that we are two or three steps forward of them. We have the situation where we have a Conservative government and the Social Democratic Party says the reforms are not very good. In Germany there is a social democratic government and the people are more on the streets than they are in Austria.”
But he notes that the other main retirement issue currently under discussion in Austria - the harmonisation of traditionally high civil service pensions with those of other workers – may not be so easy to resolve.
“Civil servants can expect 80% of salary for pensions, but the argument is that they earn less through their careers and make this up in retirement.
“The question of harmonisation is the big issue now to be resolved, but it is not so clear. Normal retirees get one year’s salary on retirement, but civil servants don’t get this money. Additionally civil servants have to pay out 20% for medical insurance and other issues.”
Asked whether the government could be doing more to promote increased second pillar provision, Janda says he believes much has been done already.
“I think if you look at Pensionskassen, insurance contracts and book reserve plans then maybe 20% of Austrian workers are covered by the second pillar. When I started my job in 1993 we had only 50,000 participants in the Pensionskassen and e0.5bn in assets. Now we have nearly 400,000 people and e11bn in assets.
“I think nearly all big companies have pensionskassen and the state has also introduced a Pensionskassen for workers dealing with social insurance, which will bring nearly 10,000 new contracts into the system.
“We also see more smaller companies such as lawyers starting more pensionskassen for employees.”
While this still leaves some 80% of the Austrian population without supplementary pensions, Janda says this is not viewed as a problem while state pensions remain high.
“Of course, there will not be so much pension for younger generations and the sensitivity about this issue rises with each reform. The government believes that it has already done a lot and that it is for the people to make any additional arrangements.”
Janda says the Austrian government is also working on changes to the country’s Pensionskassen act on the back of the pan-European pensions directive, but says amendments will be minimal while most of the directive’s stipulations on issues such as solvency are covered by Austrian law already.
“There will be no particular problems for Austria with this. Foreign pension funds could come in here, but I cannot imagine that it would be interesting for pension funds, many of which are run by social partners, to look elsewhere for clients, particularly when every country has different tax and social laws.”
For now Austria is happy to lean on state provision as the bedrock for retirement and to adjust pension income and working lives accordingly to meet future shortfalls. No doubt many will keep an eye on the country in the coming years to see how successfully the model of public rather than private provision stands up to an ageing population and an increasing government retirement bill.