Extremely expensive system

Without reforms, pension expenditure will rise massively

Contributions to the pension system are galloping away.

(Bild: S.Gnatiuk/stock.adobe.com)

Pensions are safe, but at what price? The fact is that the Austrian system is particularly expensive by international standards. Experts are urging the future government to take steps to prevent costs from spiraling out of control. "Without reforms, there is a threat of an unreasonable burden for future generations," warns Wifo economist Thomas Url.

The coalition negotiators are currently looking for five billion euros to get the deficit under control by 2025. The high need for savings is also due to the expensive pension system. Next year alone, the federal government will have to spend 2.4 billion euros more. "That would be half the restructuring package," says Url. 

State has to pump more and more into the system
"Federal funding will increase by almost 60 per cent over the next few years, and contributions by 30 per cent," emphasizes Walter Pöltner, former head of the pension commission and ex-section head. According to the Ministry of Social Affairs, almost seven billion euros more from the budget will have to be spent on pensions in the next five years alone, five billion of which will be spent on statutory pension insurance and around 1.8 billion on civil servants' pensions.

 "Anyone who says that it will all work out or that it's not a problem is either blind or can't do the maths," says entrepreneur Georg Feith, initiator of the "Generation Justice Campaign". Pöltner does not deny that pensions are secure, the only question is: at what price?

"The low de facto retirement age and the high replacement rates are key levers for reducing the need for subsidies."

Walter Pöltner, Ex-Chef der Alterssicherungskommission

Bild: Kronen Zeitung/Chris Koller

It is obvious that fewer and fewer people in employment have to finance one pensioner on average. In 1980, there were 4.5 working people for every pensioner, last year there were 3 and by 2050 there will only be 1.7. As a result, the state will have to pump more and more into the system, which will limit the scope for other expenditure. This is because the contributions are still not sufficient and the federal government has to close this gap, which devours more tax revenue year after year.

Quarter of the budget for pensioners
At 30 billion euros a year, pensions are already the largest expenditure item, accounting for a quarter of the federal budget and two thirds of social spending, not to mention the interest on rising debt. Less is spent on education (around 20 billion euros).

(Bild: Krone KREATIV/Stock Adobe)

A look across the borders shows: In the EU, in terms of economic output, only Greece, Italy and France have a more expensive system (see chart). Without countermeasures, little will change in this ranking. "Above all, the low de facto retirement age and the high replacement rates are key levers for reducing the need for subsidies," says Pöltl.

Url also emphasizes the urgency of raising the retirement age. "With an automatic mechanism, this can be linked to life expectancy." This has already been implemented in a quarter of OECD countries. The pension corridor should also be increased by one year to between 63 and 69. Apart from this, Wifo advises against "over-adjustments" and calls for higher deductions for early retirement, such as in Spain.

On the other hand, working longer beyond the statutory retirement age should also be rewarded with a better pension in retirement. Incentives to keep pensioners in work for longer (less social security and taxes) are also having an effect, as the Czech Republic, for example, shows. Older employees are also of great value to the labour market, Wifo also emphasizes.

The experts also consider pension splitting to be a sensible way of cushioning the impact of lower earnings as a woman. In this way, childcare periods are mathematically divided between the partners. With an opt-out option, there can still be freedom of choice here if someone does not want to take advantage of this. It also makes sense to strengthen the second pillar, occupational pension provision. Here, the investment restrictions should be relaxed and capital gains tax should be abolished for longer investment periods.

Capital market can supplement the pension system
And the financial market could also ease the burden on the budget, as Sweden shows: In addition to the pay-as-you-go system, there is also a capital market component ("equity pension"), which keeps the system affordable for the state. Swedish employees have to pay 2.5 percent of their gross income into pension funds. The choice can be made between the state AP7 fund and other fund solutions.