The Austrian System of Individual Pension Accounts – An Unfinished Symphony

Markus Knell

Monetary Policy & the Economy, 2013, issue 4, 47-62

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.

Keywords: pension system; demographic change; life expectancy (search for similar items in EconPapers)
JEL-codes: H55 J1 J26 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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