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The Austrian System of Individual Pension Accounts – An Unfinished Symphony

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Abstract

The new Austrian pension system based on individual accounts is a clear improvement over the former system. A serious shortcoming of the new system, however, is that it does not react to demographic changes, in particular to increases in life expectancy. I contrast the Austrian and the Swedish pension account systems to demonstrate how and why the latter is able to react to demographic changes. I also show how the Austrian system could be adapted to include such an automatic adjustment mechanism. In particular, this would require a continuous modification of the “key formula” 80/65/45 (80% replacement rate after 45 contribution years at a retirement age of 65). In a next step I argue why an increase in the average retirement age seems to be the most appropriate and viable reaction to the increase in life expectancy and why alternative adjustment policies have their limits. Finally, I discuss some commonly expressed objections to this adjustment strategy. I also sketch how a system of individual accounts could be amended in order to take some of these objections into account.

Suggested Citation

  • Markus Knell, 2013. "The Austrian System of Individual Pension Accounts – An Unfinished Symphony," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 47-62.
    • Handle: RePEc:onb:oenbmp:y:2013:i:4:b:2
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    References listed on IDEAS

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    1. repec:mea:meawpa:12252 is not listed on IDEAS
    2. Palmer, Edward, 2000. "The Swedish pension reform model : framework and issues," Social Protection Discussion Papers and Notes 23086, The World Bank.
    3. Johann K. Brunner & Bernd Hoffmann, 2010. "Versicherungsmathematisch korrekte Pensionsabschläge," NRN working papers 2010-17, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
    4. repec:onb:oenbwp:y::i:179:b:1 is not listed on IDEAS
    5. Staubli, Stefan & Zweimüller, Josef, 2013. "Does raising the early retirement age increase employment of older workers?," Journal of Public Economics, Elsevier, vol. 108(C), pages 17-32.
    6. Gasche, Martin, 2012. "Alte und neue Wege zur Berechnung der Rentenabschläge," MEA discussion paper series 201201, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    7. Markus Knell & Doris Prammer, 2006. "The Austrian Pension System – How Recent Reforms Have Changed Fiscal Sustainability and Pension Benefits," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 69-93.
    8. Markus Knell, 2012. "Increasing Life Expectancy and Pay-As-You-Go Pension Systems," Working Papers 179, Oesterreichische Nationalbank (Austrian Central Bank).
    9. Hans-Martin von Gaudecker & Rembrandt D. Scholz, 2007. "Differential mortality by lifetime earnings in Germany," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 17(4), pages 83-108.
    10. Knell, Markus, 2010. "How automatic adjustment factors affect the internal rate of return of PAYG pension systems," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(1), pages 1-23, January.
    11. Robert Holzmann & Edward Palmer, 2006. "Pension Reform : Issues and Prospects for Non-Financial Defined Contribution Schemes," World Bank Publications - Books, The World Bank Group, number 6983, April.
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    Cited by:

    1. repec:clr:wugarc:y:2016v:42i:03p:465 is not listed on IDEAS
    2. Christl, Michael & Kucsera, Dénes, 2015. "Reformoptionen des österreichischen Pensionssystem und ihre finanziellen Auswirkungen," EconStor Preprints 113283, ZBW - Leibniz Information Centre for Economics.
    3. Markus Knell & Esther Segalla & Andrea Weber, 2015. "Expected retirement age and pension benefits in Austria: evidence from survey data," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 35-57.
    4. Markus Knell, 2016. "Grundlagen eines soliden und solidarischen Pensionskontensystems," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 42(3), pages 465-495.
    5. Michael Christl & Dénes Kucsera, 2019. "Actuarial Neutrality and Financial Incentives for Early Retirement in the Austrian Pension System," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 1-22, March.
    6. No authors listed, 2016. "Überlegungen zur fairen und nachhaltigen Ausgestaltung eines Pensionskontensystems," Working Paper Reihe der AK Wien - Materialien zu Wirtschaft und Gesellschaft 159, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik.
    7. Lorenz, Hanno & Christl, Michael, 2015. "Armut: Ungleichheit & Verteilung," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 119606.

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    Keywords

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    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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