Reports
Calendar of Monetary and Economic Highlights
Economic Outlook for Austria from 2003 to 2005 (Spring 2003)
Money and Credit in the First Quarter of 2003
Balance of Payments in the Year 2002
Austria“s Portfolio Investment Position at End-2002
Financial Investment and Financing of the Nonfinancial Sectors
of the Austrian Economy in 2002 − Analysis of Financial Accounts Data
Studies
Pension Finance Reform: From Public to Financial Economics
Welfare Effects of Pension Finance Reform
Within a standard overlapping-generations model some consequences of the methods of how public pensions are financed can be formulated: Even if the rate of interest on capital is expected to be higher than the growth rate of the wage bill (which represents the internal rate of return of the existing pay-as-you-go system), any transition to a funded system makes at least one generation worse off. The gain of the members of the initial generation (who were granted a pension when the system was introduced, without having contributed in their working lives), determines the burden on later generations, caused by the pay-as-you-go method. As a reaction to the aging of the population, changes of the main parameters (contribution rate, pension level, age of retirement) will become necessary, which differ with respect to their effects on the intergenerational distribution. The introduction of a capital-based pillar may induce individuals to provide more for retirement, but does not reduce the burden of aging as such. Generally, the rationale for government interference into private old-age provision has to be discussed.
Discussion
Varieties of Capitalism and Pension Reform: Will the “Riester Rente” Transform the German Coordinated Market Economy?
The role of the pension system in coordinated market economies such as Germany is investigated within the framework of the “varieties of capitalism” literature. Complementarities are identified between a bank-based financial system and pay-as-you-go pension finance, and between the mode of economic governance in coordinated market economies and the organizational embeddedness of most occupational pension plans, which limits the financial market effects of the “Riester” reform.
Discussion
Pension Finance Reform, Tax Incentives for Life Annuities and the Problem of Adverse Selection
This paper analyzes the effects of several measures that are typically included in a pension finance reform: a cut in social security benefits, an increase in social security taxes, and tax incentives for the purchase of private life annuities. With a two-period model with uncertainty about life expectancy, it is shown that tax incentives for life annuities indeed stimulate private old-age provision, thus mitigating the effects of the other two reform instruments. However, this analysis is based on a constant annuity price. The second and more complex issue addressed in this paper concerns the problem of adverse selection in the private annuity market. First, it is explained how adverse selection leads to inefficiently high equilibrium prices. Then, the impact of the reform instruments on adverse selection is investigated. This is important because tax incentives for life annuities will only be effective if the pension finance reform does not exacerbate adverse selection and thus does not increase the equilibrium price. It is shown that tax incentives for life annuities and a cut in social security benefits alleviate adverse selection in the annuity market, while an increase in social security taxes aggravates adverse selection.
Discussion
Pension Funds and European Financial Markets
This paper assesses the relationship between the funding of pensions and the development of financial markets in Europe. While funding of retirement income is most directly related to the development of pension funds, the broader growth of institutional investors such as mutual funds and life insurers may also link to saving to meet income needs in retirement. We show that institutional investor growth in Europe is an established trend, while pension fund growth in Europe is strong but unevenly distributed. Meanwhile, institutionalisation and EMU are combining to revolutionise EU financial markets, moving their structure and behavior towards the Anglo-Saxon paradigm. Some regulatory problems for EU pension fund investments remain unresolved — and pension reform options are not yet widely grasped despite upcoming difficulties of social security pensions. Looking ahead, we show that important financial stability risks linked to ageing arise for EU retirement systems. Such risks underline the need to scale down pay-as-yougo, but be conscious of risks to funding. Reforms should hence focus on creating a diversified system; political and demographic risks of pay-as-you-go may balance the market risks of funding.
Discussion
Investment-Based Pension Reform as a Solution to the Old-Age Crisis?
Risk Issues in Pension Reform Debate
In the current pension debate, investment-based pension reform is widely presented as a solution to the problem of the fiscal unsustainability of public pension systems under the demographic pressure of population aging. The justification of this reform strategy can be shown to largely rely on the financial economics conception of substituting retirement income sources as a strategy of asset and risk diversification. When systematically applied to the pension debate, risk considerations, however, fail to convincingly back the claim of the superiority of investment-based pension finance.
Discussion
Investment-Based Pension Reform for Austria — Or Boosting Employment and Growth?
This paper discusses the often expressed view that pension reform in Austria should increase the role of the funded pillars of the pension system. The first part of the paper critically examines the main arguments in favor of more funding and concludes that in industrial countries with high saving ratios, a substantial increase in funding would dampen effective demand and growth in the short and medium run.
In the second part, the paper underlines the importance of employment and growth and highlights the interrelationship between the labor market and the sustainability of the pension system. The paper presents simulation results for Austria, which show the importance of employment growth not just for old-age pensions but also for the labor market. In order not to hamper economic growth by a shrinking labor force, it is necessary to take employment policy action aimed at boosting the participation and integration of older women and men in the labor market. If the employment growth rates of the past quarter century continue into the future and considering the latest population projection, labor force participation will rise from 67.6% now to 79.9% in 2030, thus reaching a level already achieved in the Scandinavian countries today. Similarly, the pensioners-to-contributors ratio should rise from 619 today to 716 pensions per 1,000 employment relationships in 2030. Due to the increase in labor force participation, the present financial conditions could be kept stable by raising the pension contribution rate by no more than 2 percentage points to 25.2% over the next 30 years. Discussion 175 Tax Incentives in Investment-Based Pension Reform and Fiscal Sustainability 178 The financial sustainability of public pension systems under the demographic pressure of population aging is widely recognized as a major policy issue. Hence, it comes as no wonder that investment-based pension reform is nowadays primarily advocated on fiscal grounds. Consequently, fiscal policy aims at incentivizing the substitution of private for public pension provision. In particular tax incentives for private pension schemes are part of almost any investment-based pension reform project. Therefore the effects of tax incentives for private retirement saving with respect to fiscal sustainability deserve particular scrutiny. Based on a recent analysis of the sustainability of public finances under the pressure of population aging by the Economic Policy Committee, we show in a simple projection exercise that taxincentivized investment-based pension reform can adversely affect fiscal sustainability.