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					                 The
   German and Austrian
pension system under reform
        - a comparison

              written by
     Stefan Schindler 800414-P274.
                  and
    Christian Posch 820415-P115


           Karlstad University
  Department of Business and Economics
          Karl-Markus Modén
            January 18th 2004
                                         1
Preface


In December 2003 we received the assignment to write an essay for the course Financial
Markets, Risk and Insurance. In these classes we received some forms of which we could
choose a subject. We have chosen to write about the pension system in Germany and Austria
and the current reforms.

We had to do a lot of research for this assignment and it was not always easy . It was very
interesting to find out more about the current situation of our pension system as well as our
social system. For us it was also very informative as this is a topic that will concern us soon in
the future. Therefore we learned a lot and also recogniced some consequences a certain policy
behaviour has.


We hope that you enjoy reading this report and appreciate the time and effort we have put into
this essay.

Christian Posch               Austria                820415
Stefan Schindler              Germany                800414




                                                                                                2
Introduction

In this essay we are going to describe and compare the pension systems in Austria and
Germany. Further we are going to mention reform steps taken by the governments which aim
to secure the future pension system. The aim is to guarantee a sustainable pension system that
allows a certain standard of living.

First, we give some general information on the Austrian and German pension system and
explain how the systems basically work

In the second part we are going to show some numbers and how the pension payments are
computed.

The following parts motivate the pension reform in Austria and Germany, list problems and
show consequences of the explained reform points. Finally we end by explaining the main
reform points of the pension reform 2003 in Austria and give a short conclusion.

Furthermore, we hope that this essay offers you some useful information and brings you these
two systems a little bit closer.




                                                                                            3
Index


Preface …………………………………………………………………………. 2
Introduction ......................................................................................................... 3
Index .................................................................................................................... 4
General Information .............................................................................................. 5
…. about the German pension system................................................................... 5
…. about the Austrian pension system .................................................................. 5
Current numbers .................................................................................................... 6
…. of the German pension system ........................................................................ 6
…. of the Austrian pension system ....................................................................... 6
How to compute your pension .............................................................................. 7
…. in Germany ...................................................................................................... 7
…. in Austria ......................................................................................................... 7
Motivation: ............................................................................................................ 8
Duties of the German and Austrian pension system ............................................. 8
Problems ................................................................................................................ 9
…. of the German pension system ........................................................................ 9
…. of the Austrian pension system ....................................................................... 9
Specialties of the German pension system .......................................................... 10
Differences between East and West Germany .................................................... 10
Pension Reform in Germany ............................................................................... 11
Pension Reform in Austria .................................................................................. 12
2000 ..................................................................................................................... 12
2003 ..................................................................................................................... 13
Conclusion ........................................................................................................... 13
List of sources ..................................................................................................... 14
Appendix ............................................................................................................. 14




                                                                                                                           4
General Information
       …. about the German pension system

The German pension system is a pay-as-you-go system, which means that the people working
now are paying for the currently retired people. With their monthly payments they achieve the
right to get support from the pension system after they retired (Generationenvertrag –
generations-contract). The German system is a mixture between insurance, supply and
welfare. This means that also people who never paid any contributions because of
unemployment, sickness or other reasons also have the right to receive payments from the
fond and also that the government supports this fond in case of need. The system was founded
after the Second World War, when the federal republic of Germany became an independent
country. Germany kept this system after the German Unification which led to several
problems that are going to be discussed later on. The retirement fond is not only responsible
for retired people but also for a whole lot of other groups such as disabled, widows and
widowers, orphans and all the people who lost their full ability to work.

How does the system work?
There are basically two groups of working people in Germany. On one hand there are workers
such as factory-jobs and so on and on the other hand there are employees such as office-jobs.
They have to pay their contribution to different places. The “BfA” (Bundesanstalt für
Angestellte) is responsible for employees and there is only one for all Germany. Workers pay
their contribution to their “LVAs” which are independently responsible for their respective
federal state and therefore there are 16 different “LandesVersicherungsanstalt für Arbeiter”. If
you moved from one federal state to another or if you changed your job your pension will be
paid by the one who was responsible for you at your last place of living or occupation.
The pension is prepaid at the beginning of the month and regularly transferred to your bank
account. With your death you lose the right to receive pension; your heirs can not adopt your
right to receive pension.

       …. about the Austrian pension system

Austria has a very generous pension system if compare it to some other systems in
industrialized countries. The Austrian pension system is, as the German one, a pay-as-you-go
system. It covers practically the entire workforce although not everyone has to pay. As the
Austrian state is a welfare state it also takes care for groups such as disabled, widows, orphans
and people who lost some or their full ability to work. This system equals pretty much the
German                                                                                       one.
But there are some differneces. The Austrian pension system is divided into five groups
supporting and handling different working groups:the pension insurance institution for
workers (PVA der Arbeiter), the insurance institution for railway servants (VA der ö.
Eisenbahnen), the pension insurance institution for employees (PVA der Angestellten), the
insurance institution for miners (VA d. ö. Bergbaus), the social insurance institution for the
industrial economy (SVA d. gewerbl. Wirtschaft) and the social insurance institution for
farmers (SVA der Bauern). So there are quiet many different systems within the Austrian
pension system. This often leads to misinterpretations and confusion, and also to inequalities.

How does the system work?

Nearly all working people have to pay taxes to support the pension system. Exceptions are
people earning less than a given income limit, jobless and invalid persons. Additionally to the
compulsory payments, Austrians can buy/purchase private pension insurances. More and

                                                                                               5
more Austrians use this second trace to secure a fixed future payment.The confidence in the
current system is not very high. Many people are not sure whether they can trust the
politicians or not. Therefore private insurances are welcome as a second main pillar.

There were two pension reforms in the last few years, one in the year 2000 and one in the year
2003. These two contributed a lot to the mistrust mentioned before and raised a lot of
emotions and anxiety. People are angry as they now get much less pension payments as
before. But it could have been worse for them. The untiring effort of the labour unions
(Österreichischer Gewerkschaftsbund ÖGB, Arbeiterkammer AK), protests of thousands of
affected in the streets, strikes and discussions forced the government to soften the planned
changes in the system. More information in chapter “Pension reform in Austria”.

Current numbers
      …. of the German pension system

Right now Germany has about 32 Million people who actively pay their monthly contribution
and together with their children and their spouses which do not need to pay a contribution the
number increases to 52 Million. On the other side Germany has about 16 Million people over
the age of 65 which enables them to receive money from the pension fond. The rest of the
population living in Germany does either not participate in this system such as employees of
the country (Beamte) or gets the money from other sources such as governmental social
security or private insurance.
The current contribution in percentage of the gross monthly income is 19.5% all over
Germany. There are different types of insured people. The biggest share is the group of the
actively insured which contains the voluntarily and compulsory insured. The second group is
the passively insured; this means that they are either children or spouses of an actively insured
person.
The current pension worth changes from year to year and in 2004 it is 26.13 EUR in the
western part and 22.97EUR in the eastern part. Its change depends on factors such as
inflation, economical growth or legal changes. You have to earn at least 400EUR a month to
pay the minimum contribution to the pension system which is 78EUR a month right now. The
average contribution is 470EUR in the west part and 395EUR in the east part of Germany.
There is also a maximum contribution which means that no matter how much you earn you do
not need to pay more than 1004EUR a month.

       …. of the Austrian pension system

In 2001, 3.942 million Austrians were working, This was an increase of 26% compared to
1971 (3.133 million working people). This also means that the number of people paying
pension contribution increased. This contribution varies from institution to institution. In
figure1 you can see the average monthly old-age pension according to pension insurance
institution and sex in December 2002 (Durchschnittliche monatliche Alterspension gegliedert
nach Pensionsversicherungsträger und Geschlecht). You can see that employeed people
receive the highest average pension payments and that women are clearly deprived.

Another thing to mention is that the system of active and passive insured people also exists in
Austria.

In Austria you have to earn at least 316,19€ per month to pay the minimum contribution to the
pension system. The median pension is 667,8€ per month.


                                                                                               6
The primary sources of revenues for the Austrian pension system are contributions from the
workforce. However, around 20 percent on average of outlays over the past 20 years were
covered by budget transfers. In 1998 the transfers from the government amounted to 4,21
billion Euro or 23.4 % of the outlays. In 2000 10,8% or 6,4368 billion Euro of the GDP were
used to finance the pension system. If the trend of increasing pension costs continues, the
system is not sustainable.

How to compute your pension
      …. in Germany

The basic idea for computing your pension is quite easy, but to get the right numbers for your
personal situation is a lot harder. If you work for one year and you receive exactly the average
of what all Germans earn, you receive one point (Rentenendwertpunkt). If you earn more you
get more points and the same thing if you earn less than the average. When you have reached
the age of 65 and have worked for 40 years with the average pay every year than you have
collected 40 points and therefore your pension will be: 40 x current pension worth x personal
factor. The personal factor is most of the times 1, unless you do not receive regular pension
but partial pension or early pension. Therefore the amount of your pension depends on how
much you earned and paid during your working life. The government also grants you money
for times of unemployment, raising children and doing public services such as military and
social service but also for education such as university studies and so on.

       …. in Austria

The system in Austria is a little bit different. The assessment basis is the average of the best
15 income years. For each working year you get 2 “pension percent” (Pensionsprozente) and a
normal working life is supposed to be 40 years. Totally you can gain 80% of your assessment
basis as pension payment. So the basic formula for calculating old-age pension levels is based
on three parameters, the retirement age, years of contributions, and the level of income. Of
course there is the possibility to shorten (early pension) or extend working life.


                                                                                              7
Old age pensions can, under some circumstances (due to long contribution service or
unemployment), be paid in the form of early retirement pensions. In this case you have to
except reductions. In the other case, if persons retire after the statutory pension age, they
receive a bonus of 4 percent points (4 Steigerungspunkte) for each year.

Motivation:

Under consideration of the demographic development (aging population (15,4% or 1,253.599
people over 65) the main aim of the reforms in Austria and Germany is to secure the provision
of benefits under the statutory pension scheme (PAYGO – system) on a long term basis.

In Austria, a core element of the future pension provision is the harmonization of all existing
pension-insurance systems (6 types mentioned in chapter “General Information about the
Austrian pension system”) and the resulting creation of a homogenous pension system for all
employed people.

Through social amendments of the existing system the acceptance of the pension system
should be increased and its future funding be facilitated. Furthermore, the increase of transfers
of the federal government (Bundesbeitrag) for pensions should be reduced.

Nowadays the Austrian and German pension systems face roughly the same financial
difficulties as the pension systems in the rest of continental Europe. The main driving force
behind the worsening of the pension systems in Austria and Germany in the next 30 years is
the demographic development in combination with early retirement and a generous system.
Already in the short term, the revenue-expenditure gap of the systems will widen and the
resulting deficits and debt level will become unsustainable.

In Austria, one of the main aims of the reform is to rise the actual retirement age by legal
means and through financial incentives. The legal early retirement age is raised and
deductions for early retirement and bonuses for working after the statutory retirement age will
be increased. Further, early retirement is constrained by tightening eligibility criteria for
persons suffering from reduced working capacities.

From the composition of new pensions the tendency for early retirement can be seen. In 1998
12,7 percent of the new pensions for men were regular old-age retirement pensions, about half
of the rate prevailing in 1970. The remainder were either early retirement pensions due to
long contribution service (32 %) and due to reduced working capacity (25 %) or disability
pensions. For women the share of regular old-age pensions is slightly higher (27 %).


Duties of the German and Austrian pension system

As mentioned before the German, as well as the Austrian pension system, have a number of
other duties. Granting money to those who are not able anymore to work a full job because of
handicaps or injuries is a big share of those responsibilities. The second big part is paying a so
called pension to widows and widowers, but also to half or full orphans. The third part to
mention is the subvention, the pension fond pays for retired to their health insurance and also
a special kind of care insurance which is responsible in case you need intensive care because
of sickness or age. Those three parts which actually have more or less nothing to do with
pension are one of the problems of the German pension system.


                                                                                                8
Problems
      …. of the German pension system

The non-pension duties are a big problem of the German pension system. It has to pay for
services where no one ever paid money for. They just receive money for pensions but have
more duties.
Another problem is the bad balance of old and young people in society, which is a worldwide
problem. People get older and older but there are less young and working people to support
the retired. Right now two working people have to support almost one retired which is simply
too much. If you have to give up 20% of your pay check for pension and then even more taxes
there is not much left to live of.
One of the biggest problems of the pension fond is the German Unification. One thing is that
a lot of money has been taken out of the fond to finance the Unification and also all the people
who have lived in the east part never paid any contribution to the system but of course they
are allowed to receive money. It is the same problem with the people from former German
territory who moved back to Germany after the Second World War until now. Because the
system is also based on welfare they have the right to receive a pension.

                     Demography 1950                                     Demography 2002
                     Population 51 Mio                                   Population 82 Mio




                9%                                                17%              21%
                                 31%
                                            under 20                                         under 20
                                            20 to 65                                         20 to 65
                                            over 65                                          over 65
          60%                                                           62%




                                         Percentage of people over 65


  18,0
  16,0
  14,0
  12,0
  10,0
   8,0
   6,0
   4,0
   2,0
   0,0
        50
        52
        54
        56
        58
        60
        62
        64
        66
        68
        70
        72
        74
        76
        78
        80
        82
        84
        86
        88
        90
        92
        94
        96
        98
        00
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     19
     20




         …. of the Austrian pension system

The main problem and motivation in both countries is to secure the future pension payments
and to keep the PAYGO-system sustainable.
As we can see from the lecture notes “Financial Markets, Risk and Insurance”, there are some
conditions to secure a PAYGO-system. But at the moment, there are problems with factors
like population and productivity growth. Birth rates are decreasing (0,5%), technical progress

                                                                                                        9
still seems to work, but due to divers tax reformations and an unstable stock market, people’s
confidence in saving has to be restored. At the moment, people do not have much left to save.
Also the demographic development plays an important role. In 1961, 1000 working people
supported 345 retired, while in 2002, 624 retired were supported by 1000 working people.

A further problem is the employment rate of older workers (55-64) in Austria which is almost
8 percentage points below the average of the European Union. The low employment rate of
older workers stands in contrast to the total employment rate in Austria, which is 6 percentage
points above the average of the European Union. Due to this high unemployment rate, there
are many jobless workers applying for early retirement. So either the unemployment benefit
fond or the pension fond gets burdend.



Specialties of the German pension system

The so called “Riester Rente” is a new feature of the German pension system; it is an
additional private insurance to your public insurance. It was introduced in 2001 and was made
because we already know that the public system is not going to be able to support retired
people with enough money to keep their lifestyle. You will always get a basic pension which
is enough for a living but if you want to keep your way of life you have to pay more to your
private insurance. It is supported by the government so you do not have to pay all by yourself.
There has always been a possibility to do a private insurance but now most people get one
which is supported by the government in order to get the additional financial support.
Another way of ensuring a good lifestyle in the future is an occupational insurance which
your company, you and in some cases the government pays for. Of course only large
companies can offer this service and you have to trust them. In case of a bankrupt your money
might get lost too.
All those possibilities sound expensive but the average additional contribution is about
150EUR a year. The rest is paid by the government and/or your company.

Differences between East and West Germany

Despite the fact that Germany is reunited for almost 15 years there are still some quite big
differences between the former East and the West. One of the biggest differences is the
pension worth which is the most important factor of the pension computing. In the West part
the pension worth is more than 3EUR higher than in the East part which means for an average
retired a difference of more than 100EUR a month. At the beginning it was fair because of the
lower prices in the East, but now the prices are the same and the pension is still less. This
problem is not going to be solved within the next few years.
Another difference is the acceptation of the public service years such as military or social
service. In the West the government grants you a contribution as if you earned 1400EUR a
month but in the East part only 1100EUR.
The third big difference is the points you earn for each year of work before the German
Unification. Those years do not count as much as if they would have earned the money in the
West because the people never paid a contribution to the West German pension fond. All
those differences exist for a reason but still seem quite unfair which they are.




                                                                                            10
Pension Reform in Germany

The biggest change made within the last few years has been the introduction of the
compulsory additional private insurance (Riester Rente). This has been a big step because
everybody always relied on the “Generationenvertrag” and therefore thought that the pension
system would be safe which turned out to be wrong.
In Austria this is different, as the private pension insurance is not compulsory and only for the
people who can afford to pay for a second insurance. On this note, the “richer” people gain
double. They not only receive higher pension payments (up to the maximum pension amount
= 80% of the maximum assessement basis) due to their higher income, but they also can use
a second system to secure their pension payments.

Disadvantages of the private pension insurance are that they depend on the unstable stock
market, the administrative costs are much higher and therefore the rate of return is lower.
Further, the private pension insurance market is said to work less efficient than the public due
to less clients.

Another change was the introduction of the so called “Mini-Jobs”. If you earn less than
400EUR you do not need to pay at all and if you earn less than 800EUR you only need to pay
parts of health and retirement insurance. Those “Mini-Jobs” were introduced to stimulate the
economy which still has to prove its success.

Another aim was to reduce the additional duties of the pension fond such as support of health
and care insurance of retired. They have to pay a full contribution to the other insurances now
which is about 1.7% of their pension on average. Other benefits of the retired are also going to
be cut down such as free transportation to medical treatments.

There also have been minor changes such as contribution and pension worth changes. There
are a lot of those minor novelties but some of them have been changed back after a year or
two or were replaced with other innovations.

The reforms of the last few years were planned to achieve a major change in the German
pension system, but this aim could not be fulfilled. There are several reasons for this failure of
the reforms. One reason is that the healthcare system was reformed at the same time therefore
the people and also the unions were not willing to give up so many benefits. They introduced
additional care insurance for people who need intensive care and they raised the deductibles
which is what the people dislike the most. Every time you visit a doctor you have to pay and
the same with medicine.
On the other hand the government wanted to reduce the additional personnel costs which
meant a higher contribution by the workers themselves and less contribution by the
companies. The government had to made several concessions which took away the core of the
reforms. Now people have to pay a lot more and receive fewer services. The companies on the
other hand are not that happy either; they were hoping for a significant change and less
contribution from their side which did not work out the way it was expected.




                                                                                               11
Pension Reform in Austria

2000

The early retirement age was raised (male 60 women 55 in 2000). As of 1 October 2000, the
retirement age was raised by two months at the beginning of each quarter in nine equal
increments, with an 18-month-rise which was achieved by 1 October 2002. This measures
refered not only to depend and self-employed. The early retirement age for civil servants and
persons working for Austrian railways have also increased.

The early retirement pension for persons suffering from reduced working capacity have
abolished.

If a person opts for early retirement the deductions from the basis for assessment (Abschläge
bei der Pensionsbemessungsgrundlage) for every year the person falls short of the statutory
retirement age will be increased from 2 to 3 percentage points (Abschlag von 2 bzw.
Steigerungspunkten). This implies an average reduction of the pension level of 3.8 % per year
instead of 2.5 %. Persons retiring after the statutory pension age receive a bonus of 4 percent
points (4 Steigerungspunkte) for each year.

Currently the survivors pension amounts to 40 to 60 percent of the pension of the died
husband/wife. According to the new law the spread will be increased from 0 to 60 %,
depending on the amount of own and survivor pension. If the sum of the own pension and the
survivors pension will be below 1453,46€ per month, the survivor pension must amount to 60
percent of the pension of the dead partner.

The contributions for civil servants (active and already retired) (“Pensionssicherungsbeitrag”)
will be increased by 0.8 percentage points. The contribution rates for farmers will be
increased from 14 to 14.5%. Self-employed pay 14.6 instead of 14.5 %.

Consequences

As a consequence of the extensive use of early retirement, the actual retirement age has
declined significantly below the statutory pension age of 65 for men and 60 for women. In
1997 men retired on average at the age of 58.3. Women retired at the age of 57.1 years.

The pension reform in 2000 raised the actual age at which an early retirement pension could
be claimed by 1 ½ years. In connection with this pension reform new statutory provisions on
part-time work for older employees (Altersteilzeit) have been introduced. The aim was to
keep older employees in the active labour force by offering them the opportunity to reduce
their weekly working hours, while receiving some compensation for the lost pay and not
damaging their social insurance entitlement.

Further a part-time scheme has been introduced. It can be applied to women from the age of
50 and men from the age of 55 until the early retirement age. Thus, these older workers can
work part time under the scheme for a maximum duration of 6.5 years. The working time of
full-time workers must be reduced to 40%-60% of the standard working week, and a
proportionate reduction is also possible if the employee works at least 80% of the standard
week.
If the employee’s working hours may be unequally distributed over the period of part-time
employment - if this is provided for by a collective agreement - the employer receives a

                                                                                            12
subsidy for this kind of part-time work (Altersteilzeitgeld) from the Labour Market Service
(Arbeitsmarktservice, AMS), which compensates for the surplus social insurance
contributions     paid,    up      to    100%       of      the    previous     contributions.
Originally the government expected 1000 older employees would make use of this new
opportunity to work part time. The actual number of older employees participating in the
scheme reached 22.750 by end of December 2002. The budgetary costs amounted to 230.3
Mio € in 2002. For the period 2003 to 2009 total costs of 970 Mio. € are expected.

A further consequence of the retirement age increase is that the unemployment rate among
young people has significantly increased. It is estimated that there were at least 2000 more
jobless adolescents in 2002.

The pension reform also worsens the new pensioned peoples living standard and has strong
impacts on the job market. Further it is doubtful if it really helps the government to reduce
costs.

2003

June 11th 2003 was the day when the Austrian parliament finalized the pension reform 2003.
It was a heated discussion between politicians, experts, trade unionists and the population.
The following changes have been decided:
The early retirement pension for jobless persons abolishes by 2004. The new entry age is 65
years for male and 60 years for female persons compare to 61,5 and 56,5.
The early retirement pension for persons with a long period of insurance (more than 40 years)
abolishes stepwise. Further the female pension age will increase to 65 years between 2024 and
2033.
The average income will be calculated from the best 40 income years instead of the best 15
(stepwise increase between 2004 till 2028). This will shrinken the assessement basis for the
pension payments and thereby the pension payments. To avoid cases of hardship, a
“Härteausgleichsfond” was established. People maximally can lose 10% of their pensions.
     The deductions from the basis of assessement increase from 3% to 4,2%.
     The “Pensions-Prozente” will decrease from 2 to 1,78% between 2004 and 2009.

These are the main points of the current pension reform. Consequences can not be seen yet,
but one thing is clear: people will have to sacrifice a lot of their money hard owned money.


Conclusion

The main aim of all those changes is to ensure a pension for old people, which is high enough
to live off and still affordable for the working people. This is for sure a difficult task but as
other countries also made it, it should not be impossible to succeed.
We have to conclude that the will to reform – to take strong steps- seemed to be bigger in
Austria than in Germany. Another reason might be that the opposition had been stronger in
Germany than in Austria. In any case, these steps are necessary and will hopefully enable the
state to continue financing our pension systems.




                                                                                              13
List of sources

      Lecture Notes in Financial Markets, Risk and Insurance
       by Karl Markus Modén
       Department of Business and Economics, Karlstad University

      Gds - Gewerkschaft der Sozialversicherungen, monthly magazine

Internet-links:

http://www.pensionsversicherung.at

http://www.reformmonitor.org

http://www.akwien.at/sozv_14033.htm

http://www.akwien.at/dat/Nr_7-03_Pensionsreform_2003.pdf

http://www.akwien.at/dat/Artikel_-_PV_Rueckblick_auf_die_letzten_30_Jahre_SoSi_12-
20001.pdf

http://www.akwien.at/dat/Auswirkungen_Pensionsreform_2000_Zsfg.pdf

http://www.s-newsroom.at/newsroom/1,5175,273,00.html

http://www.sozialversicherung.at/media/33855.PDF

http://www0.eduhi.at/verein/kreidekreis/zitiert/zitiert-0306/20030621Zahl.htm

http://www.bfa.de

http://www.lva-fuer-das-saarland.de
http://www.rentenino-online.de

Appendix

Figure1 …….. http://www.sozialversicherung.at/media/33855.PDF




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