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Is pension reform complete?
Earlier pension reform has not secured the sustainability of Austria’s pension system. In the OECD, Austria stands almost at the top with respect to the size of public pension outlays relative to GDP. These outlays were projected to continue increasing at an unsustainable pace, with adverse implications for social charges, employment and growth. The government has, therefore, undertaken an ambitious programme aimed at significantly slowing the trend rise in pension spending. The reform measures thus far legislated mark substantial progress in securing the sustainability of general government finances. This is notably the case for the extension of the accounting period on which pension claims are based, which increases incentives for full-time labour force participation over the life cycle, and the abolition of early retirement on account of unemployment. Some important elements are still missing, however, and the following points are important to make the reform a lasting success:
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The accumulation of pension rights should be made actuarially fair so as to allow employees to determine the length of their working life taking into consideration the trade-off between shorter life-time employment and lower pensions, while ensuring that early retirement would not raise the fiscal burden for the pension system. This would be facilitated by appropriately designed individual retirement accounts. The actual and desired redistributive elements within the pension system should be clearly identified, with desired redistribution tax financed to the extent it is not yet covered by transfers out of the federal budget.
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Efforts need to be made to ensure that efficient instruments are available to support private retirement savings as a supplement to the pay-as-you-go part. The revised system of severance pay is a considerable step in this direction. Certification of retirement savings instruments needs to proceed so as to secure a high degree of competition between eligible funds. The provision that tax-preferred pension instruments can only be invested in thin markets should be dropped.
Which labour market reforms can generate more employment?
Simulations by the OECD indicate that, without change in framework conditions, population ageing will substantially reduce labour force participation in Austria over the next decades. Austria’s transfer system contains barriers to labour force participation, in particular for older people. These need to be ended, while other channels into effective early retirement outside the old age pension system need to be closed for pension reform to be successful. The scheme that subsidises part-time employment for older employees has been revised so as to reduce adverse implication for labour supply. However, the government should consider abolishing the scheme entirely. Further important issues are:
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Preferential conditions for older people to receive unemployment benefits should be phased out.
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Abolishing incentives for early retirement requires that eligibility conditions for invalidity pensions are strictly conditional on health reasons and are tightly controlled.
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The early empirical evidence on the new system of child benefits (Kinderbetreuungsgeld) suggests that on balance it might diminish female labour supply and the tax and benefit system overall can produce sizeable effective tax rates for secondary earnings. The structure of family support policies should therefore be revisited so as to reduce unwanted reductions in female labour supply. One way to improve the compatibility of work and family obligations would be to devote a larger share of total family benefits to child-care facilities so as to increase the numbers and ease of access, thereby cutting the time spent in transporting children to and from the premises. Extending the supply of full-day schooling could also help.
Real wage flexibility at the macro level has been found to be high in Austria, and this has helped the economy to avoid large fluctuations in unemployment. However, supporting the adaptability of the economy to supply shocks and the employability of certain groups of employees, such as older people, suggest that the flexibility of relative wages needs to be improved and remaining distortive features of dismissal protection for older employees revisited.
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Wages rise significantly with age for both salaried employees and civil servants. To support the firms’ labour demand for older workers, policies should aim at abolishing the factors that hold seniority wages artificially high, i.e. out of line with productivity. Several recent policy initiatives, such as the extension of the wage base for pension claims, already go some way in providing incentives for changes in this direction. But further reform is necessary, such as revisiting remuneration schemes in the public sector. Moreover, the social partners should make further efforts to rebalance wage schedules in favour of higher employment for older people.
Wage-age profiles for men, 2001 Age group 20-24 = 100
1. Excludes tenured civil servants.
Source: Statistics Austria.
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The distribution of relative wages across sectors and firms appears to have rigid elements. To foster adjustment of wages in accordance with differential developments in employment conditions and productivity, the present “Distribution Options” at the firm level should be developed into opening clauses that allow deviations from collectively bargained outcomes if a plant level agreement comes about between the management and the labour force.
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Currently, age is one of the social considerations which employers need to take into account in their dismissal decisions. This provision has contributed to the high utilisation of effective early retirement programmes and the low employment rates of older employees. While the waiting period for application of the special dismissal protection was recently extended, a more stringent revision of age-related employment protection should be considered so as to improve the incentives to keep productivity and remuneration of older workers in line with each other and thereby increase firms’ incentives to employ older people.
What reforms can contribute to making the education system more efficient?
To ensure skills consistent with high levels and growth of productivity improving the efficiency of schooling and encouraging life-long learning is of particular importance. In the Austrian context, the potentially beneficial role of life-long learning is reinforced by the prospect of a rapidly ageing society and the desire to increase employment opportunities for both women and older persons.
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According to the OECD’s PISA study, student performance in Austria ranks in the upper middle range of OECD countries, though schools vary considerably in the quality of educational outcomes. The fact that Austria has the highest accumulated expenditure on primary and secondary schooling per student relative to GDP per capita indicates that there is considerable scope for efficiency improvements. In particular, although some progress is being made in developing quality standards for educational attainment in some areas, mandatory country-wide educational targets against which the performance of schools can be assessed on a regular basis have not been established. A commission was recently set up for the purpose of making suggestions on how to shift the system from input orientation toward focusing on learning outcomes. Reform along these lines should be implemented.
Educational performance of 15 year olds and spending on education
Deviation from average (1)
1. Average of countries in panels. A positive figure indicates above average. 2. Expenditure on institutions per student from the beginning of education to age 15. Public and private institutions except for Greece, Hungary, Italy, Portugal, Switzerland which are public only and USA which is public and independent private only. See PISA source for details.
Source: OECD - Literary Skills for the World of Tomorrow - Further results from PISA 2000; Education at a Glance 2003.
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As is apparent from the recent introduction of the general tax allowance for training, improving the skills of the workforce ranks high on the government’s agenda. The system of adult learning can be improved on several scores. Programme evaluation needs to become more common. It should become a regular tool on which the policy makers’ decisions on the use of resources for the various target groups and the design of programmes can be based. Using vouchers more widely would help in this respect by strengthening the scope for a market mechanism. Different paths of training and education should be better integrated. In particular, better links should be established that provide an option for the unemployed to develop further the skills obtained in labour market programmes by participating in education programmes. While responsibility for funding and designing adult learning is dispersed across several authorities, there is often little co-ordination between them. More co-ordinated programme design is likely to raise the effectiveness of adult training and generate savings in the general government budget.
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