Policy Note 23: Reforming the pension system for the future

The Austrian pension system continues to face major challenges due to demographic change. "Despite the reforms that have already been agreed, the pension system is currently not sustainable," says Tobias Thomas, Director of the economic research institute EcoAustria. A recent analysis by EcoAustria shows that the proportion of GDP spent on public pensions will decrease in the short term due to the positive economic development. However, without further reform measures, the expenditure ratio will rise again in the medium and longer term, namely by 1.5 percent of GDP by 2060. Although the reforms to date have made the pension system more demographic-friendly, this has also come at the cost of falling benefits. "The ratio of average pension to average earned income will fall from 56% today to 48% in 2060," explains Thomas. "Further reforms are needed to avoid the increase in the expenditure ratio in the area of pension benefits or to finance it through additional income," emphasizes Thomas. There are several options for this: Firstly, contributions can be increased by 1.5 percent of GDP by 2060. In view of the high burden on the labor factor, this does not appear to make much sense. Another option would be an additional reduction in new pensions of just under 10 percent by 2060, which would significantly weaken financial security in old age. Another option is to link the statutory retirement age to life expectancy. This will increase by seven years by 2060. "In order to avoid an increase in the pension expenditure ratio, the statutory retirement age would have to be raised by around a third of the additional lifetime in addition to the reforms already agreed. In 2060, the retirement age would then be 67," explains Thomas. However, this does not mean that the actual retirement age will increase to the same extent. In order not to further reduce individual benefit levels, employees would actually have to work until the age of 63 on average in 2060.