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1 Federal Ministry of Finance January 2012 Country fiche on pensions - Austria For the attention of the Economic Policy Committee‘s Ageing Working Group 1 In cooperation with the Federal Ministry of Labour and Social Affairs and Statistics Austria 1. Overview of the Austrian pension system 1.1. Description The public pension system in Austria is predominantly based on a pay-as-you-go (PAYG) scheme. Public pension benefits are by far the primary source of income for retirees (more than 95%). In order to harmonise the different schemes of blue and white collar workers, farmers, self-employed and civil servants, a standardised, more actuarially-oriented pension account system was introduced for all employed under 50 years in 2005, established in the Act on Harmonisation of Austrian Pension Systems. This new pension system will gradually replace those different pension schemes over the long run. The defined-benefit formula “45-65-80” is central in shaping the actual individual replacement rate. A person contributing 45 years to the public pension system and retiring at the statutory retirement age of 65 years is entitled to receive a gross public pension amounting to 80% of his average life-time insured earnings. This results in an effective annual accrual rate of 1.78%. The assessment basis is being extended gradually from the best 15 to the best 40 years of work life income until 2028 (2011: best 23 years). In the public sector it is also being extended to the best 40 years, starting from the best year in 2003 (cf. graph 1). Entitlements for a regular old-age pension arise with a minimum of 15 insurance years (thereof at least 7 contribution years) and when the statutory retirement age has been reached. Graph 1: Convergence and extension of assessment bases Due to the establishment of the Act on Harmonisation of Austrian Pension Systems a system of parallel accounting in the transformation process from the old to the new law applies. For those aged 50 years or older by 2005 old law regulations hold. Otherwise, benefits are calculated both according to the old and the new law; subsequently the sum of the two numbers is drawn, weighted by the shares of the contribution periods before and after 2005 (e.g. if the contribution period ranges from 1970 to 2010, 1/8 comes from the new law, 7/8 from the old law regulations). 1 The statutory retirement age is 65 years for men and 60 years for women. In consequence of a Constitutional Court ruling in the 90ies, the female retirement age will be gradually raised to 65 years in the period from 2024 to 2033 (by ½ years steps). Generally, bonuses/deductions for late/early retirement amount to 4.2pp per year (max. 15pp for deductions, max. 12.6pp for bonuses). According to the new law, there are two possibilities for early retirement: • From 62 years onwards, a person might be eligible for corridor pension (“Korridorpension”). The minimum requirement of insurance years is 37.5 years. For women this gets relevant only by 2028 with the phasing in of the harmonisation of retirement ages. • If work has been conducted in the area of “hard labour” for at least 10 years within 20 years before retirement, men can exit at the age of 60 years (“Schwerarbeitspension”). The minimum requirement of insurance years amounts to 45 years; the annual deduction is reduced to 1.8pp. For women this scheme becomes relevant from 2024 onwards. Beyond that, several early retirement regulations exist in the old law: • Early old-age pension due to a long period of insurance (“Vorzeitige Alterspension bei langer Versicherungsdauer”), with a minimum requirement of 37.5 insurance years. This option is expiring since 2004 by a stepwise increase of the entry age and will be fully phased out by 2017 (current entry ages: 63.5/58.5 years). • In case of a corridor pension, there is an additional annual deduction of 2.1pp for old law pensions, which is deducted without regard to the “loss ceiling” of 15pp, resulting in an annual deduction of 6.3pp. • Pension settlement for long-term insured (“Langzeitversichertenregelung” or “Hacklerregelung”): early retirement with 55/60 years (w/m) after having contributed 40/45 years. From 2014 onwards, the entry age steps up to 62 years (for men instantaneously, for women gradually starting at 57 years). Eventually, this regulation will be encompassed by the new law corridor pension. Furthermore, in case of “hard labour”, deductions are reduced to 1.8pp like in the new law. Table 1: Statutory retirement age, earliest retirement age and penalties for early retirement year M 2010 2015 2020 2025 statutory retirement age 65 65 65 65 with 20 earliest retirement age 65 65 65 65 contribution penalty in case of earliest year ret. age statutory retirement age 65 65 65 65 with 40 earliest retirement age 62 62 62 62 contribution penalty in case of earliest year 10,5% 7,4% 16,4% 15,6% ret. age F* statutory retirement age 60 60 60 61 with 20 earliest retirement age 60 60 60 61 contribution penalty in case of earliest year ret. age statutory retirement age 60 60 60 61 with 40 earliest retirement age 55 57 60 61 contribution penalty in case of earliest year 0% 10,5% ret. age * For female civil servants the statutory retirement age is 65 over the whole period. 2 2030 65 65 2040 65 65 2050 65 65 2060 65 65 - - - - 65 62 65 62 65 62 65 62 14,9% 13,2% 12,6% 12,6% 63.5 63.5 65 65 65 65 65 65 - - - - 63.5 62 65 62 65 62 65 62 7,4% 13,2% 12,6% 12,6% Source: MoF, MoSA. Due to the “co-existence” of old and new law regulations, the Austrian pension system has become rather complicated, with various rules interacting in a complex way. This is illustrated in table 1, where statutory and earliest retirement ages and penalties for early retirement are shown. With only 20 contribution years the case is rather simple, because early retirement options do not exist. For men, retiring after 40 contribution years is possible with the corridor pension. In 2010, the penalty is still computed with regard to the entry age for the early oldage pension due to a long period of insurance (“Vorzeitige Alterspension bei langer Versicherungsdauer”), which was 63 years in 2010; hence (65-63)*4.2% + (63-62)*2.1% = 10.5%. From 2020 onwards, parallel accounting applies, where according to the old legislation the penalty is 6.3% per year and it is 4.2% according to the new legislation. The share of old law is 60%, the share of new law is 40%, hence 0.6*18.9% + 0.4*12.6% = 16.4%. For 2030/40, the relative shares are 36/64 and 10/90, respectively. For 2050 and 2060, only new legislation applies anymore. For women, in 2010, 40 contributions years were still sufficient to be eligible for the pension settlement for long-term insured, which allowed them to retire at the age of 55 without deductions (men would have needed 45 years for retiring at the age of 60). Later, when women become eligible for corridor pension due to the rise of their statutory retirement age, penalties are calculated in the same way as for men. Table 1.a: Early retirement regulations Early retirement regulations according to the ... old law Early old-age pension due to a long period of insurance (“Vorzeitige Alterspension bei langer Versicherungsdauer”) Earliest possible retirement age Penalty Required insurance years 2004: 61½/56½ ... 2011: 63½/58½ ... 2017: 65/60 currently: 60/55 2016: 62/57 2018: 62/58 2020: 62/59 2022: 62/60 2024: 62/61 2026: 62/62 4.2% p.a. (max. 15%) 37.5 currently: none as of 2014: 4.2% p.a. (max. 15%) 45/40 45/42 45/43 45/44 45/45 45/45 45/45 ... new law Corridor pension 62 Hard labour 60 4.2% p.a. (max. 15%) 1.8% p.a. Pension settlement for long-term insured (“Langzeitversichertenregelung” or “Hacklerregelung”) hard labour: 1.8% p.a. 37.5 45 (of which 10 y. in "hard labour") The public pension system comprises also disability and survivors’ pensions. To be entitled to a disability pension, a medical certificate is required documenting the invalidity. Moreover, the status of disability must have prevailed for at least 6 months and one must apply for rehabilitation before applying for disability pension. The entitlement condition for a survivor pension is the death of the husband/wife. The deceased must have contributed for a 3 certain period to the public pension system (this depends on the age at which the spouse died). Pension benefits are adjusted to consumer price inflation, the assessment bases are linked to the average insured wage, both with some small discretionary room for manoeuvre for the government. If pensions claims are below legally defined thresholds (€ 793 for singles, € 1.190 for couples in 2011), the gap is closed by federal budget contributions in order to guarantee a minimum pension (in form of minimum pension allowances, “Ausgleichszulagen”). Currently, approximately 12% of all pensioners are eligible to such social allowances. The total amount is about 0.35% of GDP. The public pension system is financed mainly through compulsory contributions. These are levied on gross salaries and deducted from these before personal income tax. The present contribution rates are uniformly set at 22.8% in the private social insurance sector, whereof the employer bears 12.55% and the employee 10.25%. There are no contributions of the employers in the civil service sector. There, the employee’s contribution ranges from 12.55% to 10.25%. The contribution rates of farmers and self-employed amount to 15,25% (2011) and 17.5% respectively, the former increasing to 16% by 2014. The differences to the standard contribution rate (22.8%) are borne by federal government transfers. Contributions are levied up to a maximum assessment base of € 4.200 p.m. for employees (2011) and € 4.900 for farmers and self-employed. The federal budget also covers the deficits in most public pension schemes in the case of their actual emergence (“Bundesbeitrag”). These deficits are, thus, financed by general taxation. Contributions to public old-age provisions in Austria are exempt from taxation, but pension benefits are subject to income tax and health care contributions. Generally, private pensions in Austria (both occupational and private) are still of much less quantitative importance than public pensions. Estimates from 2008 show that private pension benefits paid in 2007 correspond to less than 5% of overall pension benefits. Nevertheless, the volumes of private pensions have increased rapidly in recent years. The Austrian Occupational Pension Act (“Betriebspensionsgesetz”) contains all regulations for occupational old age provisions (2nd pillar). This Act regulates primarily following firmrelated retirement provisions: 1) pension provision funds (“Pensionskassen”), 2) occupational collective insurances, 3) direct provisions allowed by a company to an employer and 4) life insurances. The implementation of a new severance payment (“Abfertigung neu”) in 2002 increased the relevance of the second pension pillar, as it made occupational pensions mandatory (however, disbursement due to occupational change is still possible). Since then, employers are obliged to transfer 1.53% of the monthly salary of their employees to a staff provision fund (“Mitarbeitervorsorgekasse”), set up especially for this purpose. In view of old-age provision, retiring employees can choose to receive the payout in form of the total sum (taxed 4 with 6%), a monthly paid additional pension (tax exempt) or a reinvestment in a pension investment fund (which is tax exempt). Private pension provisions made by individuals form the third pillar of the Austrian pension system. Like in the occupational sector, also in the private sector individuals can choose between a multiple range of investment products fulfilling directly or indirectly the purpose of old-age provision. Hence, in the private sector one can generally distinguish between concrete pension directed provisions and a general accumulation of savings over the lifecycle. Concrete pension directed provisions are aided by the state in order to strengthen the development of the third pension pillar. Traditionally, life insurances play a significant role in long-term savings. Private life insurance contracts have continued to show a major upward trend over the past years. While in general a private life insurance leads to a one-off payment, private pension insurance contracts are usually concluded for the purpose of obtaining a life-long pension. The most popular private old-age provision represents the premium-aided pension savings scheme (“Zukunftsvorsorge”). This was introduced in 2003 as a kind of life insurance (incl. a capital guarantee) subsidised by the state with a tax premium. After a minimum investment period of 10 years, the taxpayer may dispose of his entitlements. If the entitlements are, however, paid out, half of the allowed state bonuses must be paid back, together with a retroactive tax of 25% on the capital gains, and the capital guarantee will be lost. If the entitlements are transferred or used for pension payments, no tax will be due. This scheme has been recording strong growth since its launch in 2003. At the end of 2010 more than 1.5 million contracts have been held by insurance companies and investment firms. Contributions in 2010 were about 900 million Euros und the total of assets increased to 5 billion Euros. 5 1.2. Recent reforms of the pension system included in the projections The Austrian Pension Reforms of 2003 and 2005, together with the long-term harmonisation of the statutory retirement ages of women and men, have already been taken into account in the previous rounds of long-term public pension projections. Apart from that, the federal government introduced the following measures in its budgetary consolidation package of December 2010, which are also included in the current projections: • Rehabilitation should be intensified in order to keep people in the workforce and reduce disability pensions. Specifically, a person is now strictly obliged to go for rehabilitation before applying for disability pension. Furthermore, occupational protection will be lifted substantially. During rehabilitation, payments are higher than unemployment benefits, and unemployment benefits would also be paid out longer, if one does not find a job after rehabilitation. • The pensionsable age of the “Hacklerregelung” will be increased by 2 years (men: to 62 years, women: to 57 years) as of 2014. By introducing annual deductions, this old law scheme will be phased out with the new law corridor pension getting fully effective in the long run. • On top of that, purchasing study and schooling contributory years has been rendered more expensive since 2011 and will be fully abolished by 2014. This will make the current early pension schemes much more difficult to be eligible for. 2. Pensions projection results The projection results comprise public pension expenditures for private and public sector employees, self-employed and farmers, which – according to ESSPROS – accounts for more than 95% of total pension expenditures. They do not include occupational and private pensions as in the previous projections rounds. Table 2: Eurostat (ESSPROS) vs. Ageing Working Group definition of pension expenditure (% GDP) Eurostat total pension expenditure Occupational pensions Eurostat public pension expenditure Minimum pension allowances (paid by the federal budget as social assistance) Injured person's pensions (paid by the accident insurance) Temporary allowances (paid by the unemployment insurance) Supplementary survivor pensions Public pension expenditure (AWG) 2008 13.90% 0.55% 13.35% 0.35% 0.19% 0.04% 0.04% 12.73% In 2008, a main difference between ESSPROS public pension expenditure data and AWG (public) expenditure data arose from public expenditures spent by institutions other than the pension insurance (such as injured person’s pensions, temporary allowances). The other main discrepancy stem from the exclusion of minimum pension allowances in the 2008 AWG data set. As noted in chapter I, minimum pension allowances “top up” pension claims that are under a certain threshold in order to ensure a minimum level pension benefit for singles or couples. They are financed by the federal budget and they are captured in the current projection exercise for the first time. 1 2.1. Overview of projection results Table 3: Projected gross pensions spending and contributions (% of GDP) Gross public pensions expenditure Public pensions contributions 2000 13.8 9.1 2010 14.1 8.4 2020 15.1 8.5 2030 16.7 8.5 2040 16.5 8.6 2050 16.4 8.6 2060 16.1 8.6 Peak year 2032 2048 Overall, gross public pension expenditures in Austria are projected to rise from 14.1% of GDP in the year 2010 to a high of 16.7% in 2032 reflecting the steep rise of the old-age dependency rate and the phasing-in of reforms at the same time. A moderate decline to 16.1% of GDP in 2060 will follow, since the decline of pension expenditure in the public 2 sector slightly outweighs the increase in the private sector . Although the number of contributors stagnates or even slightly goes down over time, contributions are projected to step up somewhat from today 8.4% of GDP to 8.6% in 2060. While the number of contributors develops broadly in line with employment (cf. table 7), the average contribution 3 per employee advances with the average wage . The slight increase of total contributions can be ascribed to changes in the structure of contributors. This alludes to a shift from contributors with smaller assessment bases (farmers, unemployed) to those groups with relatively higher ones (employees, self-employed). Table 4: Projected gross public pension spending by scheme (% of GDP) 13.8 14.1 15.1 16.7 16.5 16.4 16.1 Peak year 2032 Private Sector employees 9.9 10.6 11.7 13.4 14.1 14.8 14.7 2054 Public sector employees 3.9 3.5 3.4 3.3 2.4 1.6 1.4 2010 9.7 10.8 12.4 12.6 12.8 12.9 2055 7.3 8.5 10.2 11.0 11.7 11.8 2055 Pension scheme Total public pension of which Old age and early pensions Private Sector employees Public sector employees Disability pensions Private Sector employees Public sector employees 2000 2010 2020 2030 2040 2050 2060 2.3 2.3 2.3 1.6 1.1 1.0 2025 2.4 2.4 2.4 2.2 2.0 1.9 2026 1.8 1.8 1.9 1.8 1.8 1.7 2026 0.6 0.5 0.5 0.4 0.3 0.2 2010 2.0 1.9 1.9 1.8 1.6 1.3 2011 Private Sector employees 1.4 1.3 1.4 1.4 1.3 1.2 2038 Public sector employees 0.6 0.6 0.5 0.4 0.2 0.1 2010 Others (survivors) “Old age and early pensions” comprise all pensioners aged 62 or above, while “disability pensions” comprise pensioners under the age of 62. 2 Administrative costs of the pension insurance are not captured in the projections. They sum up to around 0.2% of GDP. 3 For civil servants, contributions per employee increase more slowly than average wage, since (i) the contribution rate is going to decrease from today’s 12.25% to 10.25% and (ii) there is going to be a maximum assessment base according to the new legislation (similar to the private sector), which did not exist in the old civil servants’ regulations. 2 The projections are classified according to two schemes: the public sector scheme encompasses all civil servants from the federal, state, municipal levels and other (formerly) public entities (such as railways, postal services), and the private sector scheme comprises 4 private employees, public employees with private contracts , self-employed and farmers. The increase of private sector pension spending goes in line with the changing demographic structure of the population, while accounting for the various pension reforms phasing in, predominantly until 2034. For the purpose of the projection exercise, the categories “old age and early pensions” and “disability pensions” are defined according to an age threshold: ≥ and < 62 years, respectively. While the functional aspect of the pension obviously is not fully respected (“disability pensions” are regarded as “old age and early pensions” as soon as the pensioner reaches 62 years) mainly due to data issues, this definition comes nevertheless rather close to the current and even more to future actual practice, with (early) pensionable age at 62 years. Against this background, spending for “disability pensions” will even drop slightly in relation to GDP, while spending for old age pensions surges even until 2055. In the public sector, the reasons for the sharp expenditure decline are twofold: Firstly, last decade’s pension reforms will lead to a strong cutback of the average pension entitlement of civil servants by a substantial amount (in the terms of the benefit ratio more than twice as much as that of private sector employees). Secondly, the number of civil servants’ pensions will plummet substantially, to around 60% of the current level. This is partly due to a marked reduction of the public workforce planned by the governments during the next years, but more importantly through the substitution of civil servants by public sector employees with private sector contracts. This has already been practice in public administrations since the end 90ies. However, the fall of civil servants’ pensions does not compensate for the stronger rise of private sector pensions, which closely mirrors the change in the demographic structure of the population. 4 Public sector employees with private sector contracts are captured in the private sector pension scheme, their share in total public sector employment will increase from 56% today to 69% in 2060. Put differently, their share in total private sector employment will increase from today’s 10% to 12% in 2060. 3 2.2. Description of main driving forces behind the projection results By the following arithmetic decomposition pension expenditure dynamics is decomposed into its various “driving forces”: Ratio Ratio 64Dependency 4474 4 48 64 4Coverage 4474 44 4 8 Pension Exp . Population 65 + Number of Pensioners = × GDP Population 20 − 64 Population 65 + Employment Rate Benefit Ratio 64 41 /4 474 4 4 48 64 4 4 474 4 44 8 Population 20 − 64 Average Pension × × × GDP Working People 20 − 64 HoursWorke d 20 − 74 WorkingPeo ple 20 − 64 HoursWorke d 20 − 64 × × HoursWorke d 20 − 64 HoursWorke d 20 − 74 1 4 4 42 4 4 43 1 4 4 4 424 4 44 3 1 / labour in tensity Re sidual Table 5: Factors behind the change in public pension expenditures between 2010 and 2060 (in percentage points of GDP) Public pensions to GDP Dependency ratio effect Coverage ratio effect Employment ratio effect Benefit ratio effect Labour intensity effect Residual 201020 202030 203040 204050 205060 201060 Average annual change 1.0 1.6 -0.2 0.0 -0.4 2.0 0.040 1.9 -0.1 -0.1 -0.6 0.0 -0.2 4.6 -1.6 -0.1 -0.8 0.0 -0.6 3.2 -1.5 -0.4 -1.3 0.0 -0.2 0.6 0.5 0.1 -1.2 0.0 0.0 0.8 -0.3 0.0 -0.7 0.0 -0.1 11.0 -2.9 -0.6 -4.5 0.1 -1.1 0.211 -0.061 -0.011 -0.092 0.001 -0.009 Overall, public pension spending is expected to increase significantly in 2060, intimately associated with the strong rise in the dependency ratio of old-aged people to working-age people. While this ratio amounts to 0.29 today (2 elderly per 7 younger people), it is expected to almost double to 0.55 until 2060 (4 elderly per 7 younger people). If no other effect offset these adverse dynamics, pure ageing would boost public pension spending by 11.0 pp of GDP. However, declining coverage and benefit ratios and improving labour market participation are projected to limit the increase of pension spending to 2.0 pp of GDP. The reduction of the coverage ratio goes back predominantly to the enacted legal changes assuming a marked increase of exit ages from the labour market in the coming decades. After some reforms stepping in during the subsequent years (e.g. phasing out of old law early pension opportunities), the harmonisation of the statutory retirement age of women from 60 to 65 years between 2024 and 2033 is expected to have the largest impact on exit ages. Since this phasing-in is fully implemented by the mid 30ies, the coverage ratio is expected to remain broadly stable during the last two decades of the projection horizon. The declining number of pensions in relation to elderly people is also linked to the reduction of the relative 4 share of survivor pensions (currently 24% of all pensions, in 2060 only 18%). This results from emerging changes in family structures, converging life expectancies of women and men and fading out of pensions for WW II victims or veterans. The benefit ratio falls over the whole projection period, which in general is due to the gradual substitution of the more generous old regulations by the new law (“parallel accounting”). In particular, this implies an annual accrual rate of 1.78% compared to the 2% in the old regime and much longer actuarial assessment periods. Beyond that, the adoption of the private pension scheme for civil servants implies an even stronger decline of average pensions, since their pension entitlements were overall more generous under the old law. While the benefit ratio for private sector employees drops by 4 pp until 2060, that of civil servants’ is presumed to fall by 13 pp. Labour market developments also help to counteract demographically induced spending, but they play a more minor role: The employment rate is presumed to increase by almost 3 pp until 2060 (employment ratio effect). Table 6: Replacement rates (in % of average insured wage) Public pension scheme 2010 48 2020 47 2030 46 2040 42 2050 40 2060 37 Private sector employees 45 45 44 42 39 36 Public sector employees 79 69 73 57 57 61 Replacement rates are the ratio between newly awarded pensions (old age, early and disability pensions) and the economy-wide average insured wage (assessment basis). The average insured wage is higher for public sector employees than for private sector employees, but it is assumed to increase at a pace of only 2/3 of that of the private sector (which is - by historical means - even a generous assumption), implying a convergence of the wage levels in the very long run (beyond 2060). The reason for this assumption is that life-time earning patterns in the public sector have become flatter and more similar to those of the private sector, these patterns will fully unfold in the future. While the benefit ratio measures the relative size of the average pension (including survivors’ pensions) to average wage developments, the replacements rates shown in table 6 indicate the relative size of the first pension (and, thus, exclude survivors’ pensions). Replacement rates in the private sector will drop by 9 pp on average over the projection horizon. Consequently, lower relative first pensions feed through ultimately to the pension stock, with the respective dampening effects on benefit ratios, as explained above. Apart from parallel accounting, dampening effects stem also from the increasing share of cross-country pensions: While only 12% of the current pension stock is transferred to pensioners living abroad, it is around 17% of new pensions. Since these cross-country pension entitlements are on average smaller, replacement rates keep decreasing. The replacement rate of civil servants’ first pensions will even decline twice as much, though its pattern over time is more volatile. The large drops until 2020 and between 2030 and 2040 can be attributed to relatively abrupt terminations of transition arrangements. 5 Table 7: Number of pensioners and contributors in the public scheme (in 1000), population over 65 and total employment (in 1000) and related ratios (%) Number of pensioners (I) Number of people aged 65+ (II) Ratio of (I) and (II) Number of contributors (III) Employment (IV) Ratio of (III) and (IV) Ratio of (III) and (I) 2005 2 069 1 333 1.6 3 574 3 818 0.9 1.7 2010 2 216 1 478 1.5 3 778 4 124 0.9 1.7 2020 2 553 1 712 1.5 3 901 4 241 0.9 1.5 2030 2 904 2 159 1.3 3 822 4 164 0.9 1.3 2040 3 051 2 485 1.2 3 770 4 108 0.9 1.2 2050 3 224 2 545 1.3 3 707 4 041 0.9 1.1 2060 3 213 2 584 1.2 3 612 3 939 0.9 1.1 In 2010, the number of pensioners amounted to 2,215.614 (45% men, 55% women), of whom 1,912.504 (86%) received only one pension, 300.713 (almost 14%) received 2 pensions and 2.397 (approx. 0.1%) received three or more pensions. The overwhelming majority of the “multi-pensioners” (84% of them being women) receive an old-age (81%) or an invalidity pension (17%) in combination with a survivors’ pension. From the total sum of 2,535.385 pensions, 1,813.020 (72%) were granted to people aged 65 years upwards. Due to the reforms and the higher life longevity in the future, this share is expected to go up to 85% by 2060. While still 12% of all pensions are granted to civil servants today, this share will go down to 5% in 2060. In the public pension sector, the share of persons aged 65+ years is slightly higher (currently 74%, 91% in 2060), which is probably due to the fact that the statutory retirement ages for female civil servants are fully harmonised with men, i.e. the legal age is 65 years already by now. On the revenue side, the number of contributors will slightly decrease, developing broadly in line with total employment. Table 8: Pensions* (all schemes) to inactive population ratio by age group (%) 2010 2020 2030 2040 2050 2060 Age group -54 7 7 6 6 6 4 Age group 55-59 80 69 74 72 69 69 Age group 60-64 118 113 100 112 107 101 Age group 65-69 117 133 116 116 127 125 Age group 70-74 128 130 122 102 118 118 Age group 75+ 135 131 133 127 122 121 * Ratios may increase beyond 100%, since some people receive more than one pension. With regard to the decomposition in table 8, there are three different patterns underlying these developments: Firstly, within the age groups -54, 55-59 and 60-64 years both the number of pensions and the number of inactive people will decline, the former at a faster pace than the latter. Secondly, this trend is reversed in the age group 65-69 years: Both indicators show an upward trend, but the number of pensions rises faster than the corresponding inactive population, this brings about an increasing ratio. This illustrates the “reshuffling” of pensioners from the former groups (-54, 55-59, 60-64 years) to the latter (6569 years), which is a consequence of increasing retirement ages. The third pattern can be 6 observed in the age groups above 70 (70-74, 75+ years), where both the number of pensions and the size of the inactive population are growing continuously, but the latter stronger than the former (e.g. due to the lower share of survivors’ pensions). Table 10: Projected and disaggregated new public pension expenditure New pension I. Projected pension expenditure (m. Euro) 2010 1 716 2020 2 814 2030 3 591 2040 4 467 2050 6 594 2060 8 552 private sector employees 1 370 2 254 3 113 4 216 5 950 7 685 public sector employees 346 560 478 251 644 867 II. Average contributory period 36.0 37.2 37.6 37.5 37.7 37.7 private sector employees 35.7 36.8 37.2 37.4 37.4 37.4 public sector employees 39.4 41.0 42.6 42.1 42.3 42.6 III. Monthly average pensionable earnings 2 475 3 489 4 912 6 974 9 875 13 944 private sector employees 2 403 3 419 4 853 6 892 9 789 13 902 public sector employees 3 399 4 615 5 965 8 515 11 494 14 706 IV. Average accrual rates (in %) 1.33 1.27 1.32 1.13 1.07 0.99 private sector employees 1.25 1.22 1.19 1.12 1.05 0.96 public sector employees 2.01 1.68 1.70 1.36 1.34 1.43 100 118 112 108 118 117 private sector employees 91 105 104 104 111 110 public sector employees 9 13 8 4 7 7 14 14 14 14 14 14 1 663 2 724 3 544 4 471 6 556 8 530 private sector employees 1 370 2 254 3 113 4 216 5 950 7 685 public sector employees 346 560 478 251 644 867 53 90 47 -5 38 22 private sector employees 0 0 0 0 0 0 public sector employees 0 0 0 0 0 0 V. Sustainability / Adjustment factor VI. Number of new pensions (in 1.000) VII. Average number of months paid the first year VIII. Product of II – VII (m. Euro)* I-VIII * Differences may arise due to rounding errors Table 10 shows a breakdown of the projected new pension expenditure. Unlike the development on the civil servants’ side, spending on new pensions in the private sector moves rather smoothly. In the civil service, regular recruiting will resume in the coming years after some years of stagnation. Furthermore, the number of new pensions will peak around 2020 and will decline steadily afterwards. Once the number of new pensions will have reached its low at around 2040, it will start to rise again. 7 2.4. Sensitivity tests Given the uncertainty surrounding the assumptions of long-run projections, it is necessary to carry out a number of sensitivity tests so as to quantify the responsiveness of projection results to changes in key underlying assumptions. Pension expenditure dynamics could be dampened by higher labour productivity growth and higher employment rates, especially, higher employment rates of older workers. On the other hand, additional pressures will be 5 put on pension expenditures assuming a higher life expectancy and lower migration. Table 12: Public and total pensions expenditures under different scenarios (deviation from the baseline) Public pensions expenditure Baseline Higher life expectancy Higher lab. productivity (+0.1 pp.) Lower lab. productivity (-0.1 pp.) Higher interest rate (+0.5 pp.) Lower interest rate (-0.5 pp.) Higher emp. rate (+1 pp.) Higher emp. rate of older workers (+5 pp.) Lower migration (-10%) 2010 14.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2020 15.1 0.0 0.0 0.0 0.0 0.0 -0.1 -0.2 0.0 2030 16.7 0.0 -0.1 +0.1 0.0 0.0 -0.4 -0.7 +0.1 2040 16.5 +0.1 -0.2 +0.1 0.0 0.0 -0.5 -0.9 +0.2 2050 16.4 +0.2 -0.2 +0.2 0.0 0.0 -0.6 -0.9 +0.4 2060 16.1 +0.2 -0.3 +0.1 0.0 0.0 -0.7 -0.7 +0.4 As already shown before, pension spending is projected to increase from 14.1% today to 16.1% of GDP in 2060 in the baseline scenario. The annual average GDP increase amounts to 1.42% in real terms, while annual average real pension spending increases by 1.69%. Higher life expectancy: A scenario with an increase of life expectancy of one year by 2060 compared with the baseline projection. The assumption of higher life expectancy will raise expenditure in 2060 by 0.2 pp of GDP. The increase develops gradually in line with the higher longevity, annual average real GDP growth is the same as in the baseline scenario, the corresponding figure for pension spending rises to 1.72%. Higher life expectancies leaves average pensions unchanged, but increases the years spent in retirement and, hence, the number of pensions. Higher/Lower labour productivity: Labour productivity growth is assumed to converge to a productivity growth rate which is 0.1 pp higher/lower than in the baseline scenario. The increase/decrease is introduced linearly during the period 2016-2025, and remains 0.1 pp above/below the baseline thereafter. If the average productivity growth will increase/decrease by 0.1 pp, public pension expenditure will be reduced/raised by 0,3/0,1 pp of GDP in 2060, respectively. Annual average real GDP growth will go up/down to 1.50/1.34% (i.e. ±0.08pp compared to 5 As interest rates do not influence the projections for the social security pension expenditures in Austria, the scenario of „higher/lower interest rate“ is irrelevant for the Austrian case. 8 the baseline), while annual average real pensions spending amounts to 1.74/1.62% (+0.05/-0.07pp). The number of pensions is almost unchanged compared to the baseline, the average pension spending per pensioner changes: With gross replacement rates being equal or even slightly above/below with higher/lower productivity, benefit ratios decrease/increase. This is owed to the fact that the assessment base of first pensions is adjusted to wage developments (hence, “neutral” to productivity shocks), whereas the benefit ratio reacts inversely to wageprice differentials (due to inflation adjustment of existing pensions), the latter rising/falling in the case of higher/lower productivity. Higher employment rate: A scenario with the employment rate being 1 pp higher compared with the baseline projection. The increase is introduced linearly over the period 2016-2025 and remains 1 pp higher thereafter. The higher employment rate is assumed to be achieved by lowering the rate of structural unemployment (NAIRU). A rise in the employment rate compared to the baseline scenario is projected to cause a reduction of pension expenditures by 0.7 pp at the end of the projection period. Considering annual average real GDP and pension spending growth rates, ¼ of the overall dampening effect stems from the denominator effect (enhanced GDP growth, 1.44% on average) and ¾ is due to the numerator effect (decreased pension spending, 1.63% on average). The denominator effect comes from higher employment raising (potential) output. The numerator effect is due to the reduction in the number of pensions, slightly compensated by higher pension entitlements. Higher employment rate older workers: A scenario with the employment rate of older workers (55-64 years) being 5 pp higher compared with the baseline projection. The increase is introduced linearly over the period 2016-2025 and remains 5 pp higher thereafter. The higher employment rate of this group of workers is assumed to be achieved through a reduction of the inactive population. An increase of the employment rate of the elderly (55-64 years) in relation to the baseline scenario will result in lower pension expenditures by 0.7 pp in 2060. However, other than in the previous scenario, spending reductions are higher in former years from 2030 onwards, where they peak at 0.9 pp. If higher employment is concentrated among the older workers, the impact on the number of pensions is stronger and occurs earlier. Lower migration: A scenario with 10% less migration compared to the baseline projection. If migration is 10% lower than in the baseline, pension spending to GDP will increase by 0.4 pp in 2060. This result draws heavily on the migrant population to become, to a large extent, part of the working age population until 2060, therefore only a small fraction adds to the retirees. Hence, lower migration decreases employment and output, whereas pension spending fall only marginally (i.e. therefore the “denominator effect” dominates the “numerator effect”). 9 2.5. Description of the changes in comparison with the 2006 and 2009 projections Table 13: Change in public pension expenditure to GDP during the projection period under the 6 2001, 2006, 2009 and 2012 projection exercise 2001 (2001-2050) 2006 (2005-2050) 2009 (2007-2060) NEW (2010-2060) Public pension to GDP Dependency ratio Coverage ratio Employment effect 2.4 -1.0 0.9 2.0 10.5 11.3 9.9 11.0 -3.0 -5.8 -2.6 -2.9 -2.2 -1.3 -0.5 -0.6 Benefit ratio+ labour intensity effect -2.9 -4.3 -5.0 -4.4 Residual 0.1 -0.8 -1.0 -1.1 Table 13 presents the effects of the different underlying factors on total pensions spending across the current and previous projection exercises. However, one has to be cautious with comparing the differences over time due to the varying magnitudes of the residuals. The demographic outlook has worsened since the last round, i.e. the dependency ratio has stepped up. The employment effect is rather stable compared to 2009, the expected drop of the coverage ratio is somewhat higher, the decline of the benefit ratio somewhat lower than in the previous projection. The changes of the coverage and benefit ratios stem from changed assumptions about the future development of cross-country pensions: In the 2009 projections the share of (on average smaller) newly awarded cross-country pensions was supposed to be around 20% of all new pensions, in the current projections it is assumed to be only around 17%. This means that there are presumed to be fewer, but on average larger pension entitlements than projected in 2009. But most importantly, GDP assumptions are significantly lower (1.4% on an annual average) compared to 2009 (1.6%). Adding the worse demographic outlook (the work force is supposed to decline faster than assumed in 2009), this explains the increase of projected pension spending in % of GDP. Table 14: Decomposition of the difference between 2009 and the new public pension projection (% of GDP) Ageing Report 2009 Change in assumptions Improvement in the coverage Change in the interpretation of constant policy Policy related changes New projection 2000 13.4 2005 13.2 0.3 2010 12.7 1.0 0.4 2020 13.0 1.7 0.4 2030 13.8 2.5 0.4 2040 13.9 2.2 0.4 2050 14.0 2.0 0.4 2060 13.6 2.1 0.4 0.4 13.8 13.5 14.1 15.1 16.7 16.5 16.4 16.1 6 The new labour intensity effect is added to the benefit ratio, in order to be comparable to former calculations. 10 3. Description of the pension projection model and its base data 3.1. Institutional framework for long-term pension projections Traditionally, medium-term pension projections, covering at least five future years, are contained in the yearly report submitted by the Austrian Pension Commission (APC) to the federal government in preparation of annual pension adjustments. This consultative body represents the main forum for periodic policy discussions. It is composed of experts, academics, government and social partner representatives. Initially, these medium-term projections, which are limited to the private social insurance schemes ("gesetzliche Sozialversicherung"), have been the central policy instrument for assessing pension developments. However, the tendency towards a more frequent use of quantitative analyses and external advice was intensified during past reform efforts. As a result, long-term pension projections based on demographics by Statistics Austria were presented as a complementary tool to clarify the need for adjustment and to assess the impacts of the major past reform efforts initiated by the federal government. This has proven to be a very helpful and transparent instrument. This is why, with the aim to have long-term pension projections constantly available and to ensure long-term financial sustainability of the Austrian pension system, the federal government set up a permanent monitoring mechanism as of 2007. The APC reviews financial developments in the pension system every three years and in particular with regard to the sustainability factor newly established in 2005. This sustainability factor does not operate automatically. The analysis of the financial sustainability of the Austrian pension system by the APC is based on recent demographic projections of Statistics Austria, in particular projections of life expectancy at the age of 65. If life expectancy exceeds the reference value as defined in the law by more than 3% the committee is obliged to put forward respective proposals to offset potentially higher pension expenditures (e.g. through changes in the contribution rate, retirement age, benefit adjustment). The APC concluded work on the sustainability factor the first time in April 2011 with a set of recommendations to the federal government. The APC will now puts its emphasis on the monitoring of the implementation of measures to increasing actually the effective retirement age during the next decade. However, a new and more effective monitoring mechanism together with a reform of the APC is also foreseen by the coalition agreement. 11 3.2. Assumptions and methodologies applied The Austrian pension projections within the given EU framework are based on two autonomous models, covering the private social insurance sector and the civil service schemes, respectively. They include all benefits and contributions to old-age, earlyretirement, disability and survivor schemes. The pension projections, therefore, include all public pension expenditure and , for the first time, also cover additional social assistance benefits (minimum pensions allowances). The pension projections contain the effects of all existing major pension reforms. Both models consist of partial equilibrium models and comprise deterministic elements only. In order to achieve consistency in the results, the two basic models for the private social insurance and the civil service sectors are consolidated, both as to macroeconomic developments and to expected shifts of contributors from one to the other category of schemes. For instance, the developments in civil service sector employment are captured by the private social insurance sector model; vice versa the macro scenario of the private social insurance sector schemes forms an important input into the civil service projections. Hence, though the two models are autonomous, they have been made fully consistent with regard to employment and wage developments. The private social insurance sector model, accounting for nearly three quarters of total public pension expenditure is central to simulate the financial effects of population ageing. It covers all relevant social insurance schemes, for blue and white collar employees (ASVG) incl. public employees with private contracts (“Vertragsbedienstete”), self-employed and farmers, among others. The model is composed of two major blocs that are intimately linked together. The macro part is made up of ten modules, reflecting economic, labour market, public finance and pension insurance developments. In effect, most single parameters are endogenously determined with the exception of participation and inflation rates, which fit in as exogenous inputs. The pension-specific micro part relies on inputs from the macro side on employment and on the payroll, from demographics and from age-related time series describing past pension contributions and benefits. These micro modules are designed so as to incorporate already enacted reforms with their effects in the near and distant future and to simulate reform options. These pension modules permit to calculate the bulk of already existing pensions, the number of new pensions and of exits, average pension benefits and replacement rates as well as aggregate figures in a given (future) year. On the other hand, pension contribution rates and the level of the social insurance pension deficit covered by the federal budget feed back into the macro modules. Secondly, the civil service model takes into proper consideration the fact that these pension benefits are fully financed out of the federal, Länder and the various communal budgets. The federal sector clearly dominates by size. In this vein, the federal segment comprises all pension and survivors’ benefit payments to civil service retirees of the federal government, the postal, telecom and railway services and specific groups of regional governments, such as primary and secondary school teachers. However, the model also takes account of all vital developments at the other government levels. 12 Ongoing structural reforms in the civil service sector aim at enhanced application of private-sector-based labour contracts for employees in the public sector (“Vertragsbedienstete”). As a general trend, civil service developments are assumed to be much more exposed to the present age-structure in the civil service and the future internal reforms rather than to demographics and economic developments, which are nonetheless taken into adequate consideration. These reform measures will dwell upon the comprehensive efforts to harmonise private social insurance and civil service sector pension systems, raising effective retirement ages and contribution rates as well as pursuing restrictive recruitment in the civil service sector in general and into the civil service status in particular. 13 3.3. Data input 3.3.1. Demographic developments According to the EUROPOP2010 population projection, the Austrian population is expected to increase from 8.4m persons today to a peak of 9.0m in 2043, before it starts to decline again to a level of 8.9m by 2060. The overall size of the Austrian population is projected to be larger by about 480.000 inhabitants by then, but also much older than it is now. According to the projections, the working-age population (aged 15-64) will continue to expand modestly from 5.67m to 5.70m people until 2019, then it will go down to a level of 5.1m by 2060 (despite continuous positive net immigration of 30.000 people on average). Over the whole projection period, the total labour supply will drop by 5%. The young population (aged 0-14) will decline by 3% over the projection horizon, while the elderly population (aged 65 and above) will increase by 75%, rising from 1.5m today to 2.6m in 2060. The very old population (80+ years) is projected to rise even stronger, from about 405.000 today to over 1 million by 2060. The old-age dependency ratio (the ratio of persons 65+ years in relation to the age cohort 15-64 years) almost doubles from 26% at present to 51% in 2060 due to the baby-boom generation reaching the retirement age and life expectancy increasing by more than 6.5 years. The economic dependency ratio (i.e. the ratio of people not in the labour force to the people in the labour force) will step up from 97% to 125%, as the fall in the young population will not compensate for the much stronger rise of older people. The convergence scenario approach employed in the EUROPOP2010 projection by Eurostat assumes a process of convergence in key demographic determinants (fertility rates, mortality rates/life expectancy, migration) across Member States to that of the forerunners over the very long-term (by the year 2150). For Austria, in consequence, the total fertility rate is projected to rise from 1.39 in 2010 to 1.46 by 2030 and further to 1.56 by 2060. Life expectancy at birth of men is projected to increase by 7.2 years over the projection period, from 77.6 in 2010 to 84.8 in 2060. Life expectancy of women is expected to go up by 6.1 years, from 83.0 in 2010 to 89.1 in 2060. Annual net migration inflows are projected to increase from about 19,000 people in 2010 to 35,000 by 2020 and then decline again to 26,000 people by 2060. In an additional calculated “lower migration scenario” the assumption of 10% less migration would lead to a drop of the working-age population (15-64) of 5.7m today to 4.9m by 2060, which is approximately 170.000 less than in the baseline scenario. 3.3.2. Labour force and employment developments The labour force projection (based on a cohort component methodology initially defined by the OECD) shows the outcome for the labour force by extrapolating recent trends in rates of entry to and exit from the labour market. This base case projection reflects the working assumption of “no policy change” and, therefore, does not account for more or less likely future developments. Since the common macroeconomic projections of the Ageing Working Group already account for the pension reforms of the last years, in particular the effects of 14 raising and harmonising legal retirement ages and enhancing financial incentives to remain longer at work, their effects on employment are reflected by the Commission macro assumptions, accordingly. The labour force over the next 50 years is projected by combining the projections of population and of rates of participation by gender/age group (based on the EU labour force concept). The overall participation rate (for the age group 15 to 64) in Austria is anticipated to increase by 2.5 pp over the period 2010-2060 (from 75.0% in 2010 to 77.6% in 2060). The projected upward shift in the overall participation rate is mainly due to the increase of participation rates for women and the elderly. While the participation rate for men is presumed to decrease by 1.0 percentage point over the projection horizon (from 80.8% in 2010 to 79.7% in 2060), the participation rate for women will be boosted by 6.0 pp (from 69.3% in 2010 to 75.3% in 2060). For the total age-group 15-74, the projected participation rate oscillates around the current rate of 66.7%. Apparently, due to the enacted pension reforms, the biggest raise in participation rates is projected for older workers (55-64 years); around 21.4 pp for females and 4.0 pp for males within the projection horizon. Yet, the relative improvements on the labour market cannot outweigh the changes of the overall demographic structure of the population, so that the total labour force (aged 15 to 74) is projected to drop by 5% from 2010 to 2060, whereby the female labour supply drops by 1.1% and the male labour supply decreases by 8.3% within the projection horizon. Unemployment rates are expected to converge to the estimated NAIRU in 2015, based on the Spring 2011 economic forecasts by the European Commission and the medium term extension of the production function method, afterwards they converge to the country specific minimum (capped at 7.3% for countries with high rates). For Austria, these assumptions imply an initial unemployment rate of 4.5% in 2010, decreasing to 4.1% until 2015 and staying at this level thereafter. Given the population projection, the unemployment rate assumptions and the labour force projection, the overall employment rate (of people aged 15 to 64) in Austria is projected to increase from 71.7% in 2010 to 72.8% in 2020, and to reach 74.4% in 2060. The old-age employment rate (55-64) is expected to increase from the initially low level of around 42% at present to 55% in 2060. This relates to the effective increase of the retirement age by about 2.1 years for women (from 60.2 to 62.3 years) and 1.3 years for men (from 61.3 to 62.5 years) over the projection horizon. Women's employment rate (15-64) is expected to rise by 6.1 pp from 66.3% in 2010 to 72.4% in 2060. The expected increase in overall employment rates is assumed to result in a further slight employment growth in the period up to 2018. Then employment will start to decline by around 0.2% per year on average until 2060, thereby steadily contributing negatively to potential GDP growth. 3.3.3. Long run growth As in previous projection rounds, a production function approach for projecting potential output growth has been applied. 15 The annual average GDP growth rate in Austria is projected to decline from 2.0% in 2010 to 1.3% in 2060. Over the whole period 2010-2060, real GDP growth rates in Austria comply with those in the EU-27 area, amounting to 1.4% on average. Driving factors of GDP growth are labour input and labour productivity, whereby economic growth up to 2060 is strongly influenced by a shrinking labour supply. Labour input in Austria is projected to increase up to the 2020s. Thereafter, the changes of the demographic structure act as a drag on growth. Henceforth, labour productivity will be the sole source of economic growth. For Austria, labour productivity growth (which is based on assumptions about total factor productivity growth and capital stock developments) is projected to remain fairly stable throughout the projection period close to 1.5%. 16