The expansion of Austria's occupational pension provision has the potential to stabilise the pension system, increase the purchasing power of pensioners and is a policy that is widely supported by the population.
Photo credit: Valida
Martin Sardelic, Chairman of the Executive Board of Valida Vorsorge Management (left), and Philipp Mayer, Member of the Executive Board of Valida Vorsorge Management (right)
In 1909, when the Austrian pension system was established, the ratio of people over the age of 65 to people of working age (20-65) was 1:9. Since then, there have been significant changes in demographics, with the current ratio standing at 3.1 people of working age for every one person of pensionable age. According to forecasts, this ratio will be less than two by 2060. These facts show that the domestic pay-as-you-go system is no longer sustainable and that funded supplements are needed.
Current measures not sufficiently sustainable
The Austrian government is already implementing measures such as the gradual increase in the retirement age of the corridor pension, the introduction of part-time work for older workers and the introduction of a sustainability mechanism to ensure the ‘long-term financial viability and stability of the pension system’.
Although these individual measures can reduce future cost increases for the public sector, they do not create a sustainable, solid 3-pillar model. At present, only one in five employees and one in ten pensioners in Austria has a pension fund contract through their (former) employer. Statistically, €90 of every €100 in pension benefits comes from the state, €4 from company pension schemes, and €6 from private pension schemes.
Second pillar very popular according to survey
Strengthening the second pillar would have a positive economic impact in the long term, as both tax revenues from pensions and the purchasing power of pensioners would increase - and is widely supported by the population: according to a study by the market research institute Spectra, 88% of respondents are in favour of subsidies to expand the second pillar. On average, Austrians would like to see the second pillar's share increase from 4% to 26%.
In order to achieve this increase, we consider the following measures to be particularly effective:
1. Supplementary pension for everyone
Ideally, all collective agreements should include a company pension solution. According to the Spectra survey, seven out of ten Austrians support the call for mandatory pension fund solutions.
2. Salary conversion
All employees should have the right to convert part of their gross salary as a tax-free contribution to a pension fund. 80% agree with this demand and 44% would do so according to the survey.
3. Use severance pay as a pension
New severance pay should normally be invested until retirement and only paid out early in cases of social hardship. Eight out of ten respondents were in favour of this proposal.
4. Improvement of the existing system
Following best practice examples in Europe, all pension fund customers should be offered a life-phase model where the investment strategy is gradually adjusted according to age. For young people, a dynamic investment is recommended due to the higher long-term earnings potential. For pensioners, on the other hand, a conservative investment helps to minimise fluctuations in the amount paid out. This concept would not involve any additional financial outlay, but it would require a change in the law.
Martin Sardelic, Chairman of the Executive Board of Valida Vorsorge Management
Philipp Mayer, Member of the Executive Board of Valida Vorsorge Management