A. Pension System

As in most continental European countries, the Austrian public pension system is built on the concept of solidarity among generations. The public pay-as-you-go pension system provides the principal source of income for retirees. Despite some build-up in recent years, fully-funded pension schemes are still not very important.

Reflecting the corporatist nature of the system, different compulsory pension schemes exist for different professional groups. There are three major schemes for the private sector: (1) Allgemeines Sozialversicherungsgesetz (ASVG); (2) Gewerbliches Sozialversicherungsgesetz/Freiberuflich Selbständige-Sozialversicherungsgesetz (GSVG/FSVG); and (3) Bauern-Sozialversicherungsgesetz (BSVG) for dependent workers, self-employed, and farmers, respectively. Civil servants have their own pension scheme covering the three levels of government and a number of public sector entities. The scheme for private dependent workers (ASVG) is by far the largest and covers around three-quarters of the employed. The schemes for the self-employed and farmers cover 12 percent, while 10 percent belong to the civil servant plans. Only around 4 percent of the employed earn below a certain minimum threshold income and are not covered by any of the schemes.

Public pension schemes provide old-age, early retirement, disability and survivor pensions. Eligibility for old-age pensions depends on the length of the contribution period, with a minimum age requirement of 65 for men and 60 for women in the ASVG. For civil servants, the minimum pension age is 65 for both genders. Early retirement pensions are provided based on either length of contribution, length of unemployment spell, or reduced capacity to work. Early retirement due to reduced capacity to work was, however, recently abolished and claimants directed to the disability schemes. Under the ASVG scheme the minimum early retirement age for men and women is currently being raised to reach 61.5 and 56.5 years by 2003, respectively, while for civil servants it is being raised to 61.5 for both men and women (see Box 1 for recent pension reforms). Finally, disability pensions are subject to medical certification, and survivor pensions to marital status, age, and/or disability.

Early retirement and disability pensions have gained ground over time due to relatively easy access and generous benefits. In 1999, only around 15 percent of new pensions were regular old-age pensions, about half the share in 1970. The remaining 85 percent was early retirement, disability, and survivor pensions, with shares of 45, 13, and 27 percent, respectively. As a result of the popularity of early retirement and disability pensions, the effective retirement age is significantly below the statutory pension age in both the private and public sectors. In 1999, the average retirement age was 57.6 years (58.4 for men and 56.7 for women) in the private sector schemes (Table 1) and 59 years for federal civil servants. Compared to other countries, the labor market participation rate of elderly in Austria is consequently low (Figure 1).

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Austria: Participation Rates

(Elderly, aged 55-64)

Citation: IMF Working Papers 2002, 216; 10.5089/9781451875096.001.A001

Source: Eurostat

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Table 1.

Austria: Average Retirement Age in the Private Sector Scheme

Source: Bundesministerium für Sozialc Sichcrhcit und Generationen (BMSG).

Table 1.

Austria: Average Retirement Age in the Private Sector Scheme

	Men			Women
	1970	1980	1999	1970	1980	1999
Old-age and early	64.2	62.5	60.6	61.5	59.5	58.0
Disability	56.6	53.9	50.4	56.6	55.1	48.3
All	61.9	59.2	58.4	60.4	58.3	56.7

Source: Bundesministerium für Sozialc Sichcrhcit und Generationen (BMSG).

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Table 1.

Austria: Average Retirement Age in the Private Sector Scheme

	Men			Women
	1970	1980	1999	1970	1980	1999
Old-age and early	64.2	62.5	60.6	61.5	59.5	58.0
Disability	56.6	53.9	50.4	56.6	55.1	48.3
All	61.9	59.2	58.4	60.4	58.3	56.7

Source: Bundesministerium für Sozialc Sichcrhcit und Generationen (BMSG).

Pension benefits in Austria are generous by international standards. Total spending on pensions in 2000 was around 14.5 percent of GDP, which is significantly higher than the EU average (Table 2). In the private sector pension schemes, the maximum replacement rate is 80 percent, while benefits for civil servants are not subjected to a maximum level.^{2 3} Average replacement rates in 1998 for old-age, early retirement, and disability pensions under the ASVG scheme amounted to 63.5 percent on a gross basis and 78 percent on a net basis (benefits are subject to income tax and health care contributions). The benefit level depends on the retirement age, years of contribution, and the level of income determined as the average of the best 15 income years.

Table 2.

Austria: Public Pension Spending in EU in 2000

(In percent of GDP)

Source: EU Economic Policy Committee.

Table 2.

Austria: Public Pension Spending in EU in 2000

(In percent of GDP)

Austria	14.5
Italy	13.8
Greece	12.6
France	12.1
Germany	11.8
Finland	11.3
Denmark	10.5
Belgium	10.0
Portugal	9.8
Spain	9.4
Sweden	9.0
Netherlands	7.9
Luxembourg	7.4
United Kingdom	5.5
Ireland	4.6
EU	10.4

Source: EU Economic Policy Committee.

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Table 2.

Austria: Public Pension Spending in EU in 2000

(In percent of GDP)

Austria	14.5
Italy	13.8
Greece	12.6
France	12.1
Germany	11.8
Finland	11.3
Denmark	10.5
Belgium	10.0
Portugal	9.8
Spain	9.4
Sweden	9.0
Netherlands	7.9
Luxembourg	7.4
United Kingdom	5.5
Ireland	4.6
EU	10.4

Source: EU Economic Policy Committee.

Adjustment of pension benefits is intended to secure that average pensions increase in line with average wages (net of contributions). The indexation factor is annually determined and proposed for government approval by the Minister of Social Affairs on the basis of recommendations made by representative bodies of the insured. Given that new retirees normally receive a higher pension than old pensioners, there is a structural upward drift in average pensions. Taking this into consideration, the adjustment of pension benefits is designed to ensure that the sum of the adjustment factor and the structural drift element add up to the average increase in net wages.

Contributions are insufficient to cover the total spending on pensions. Contribution rates differ between the different pension schemes and range between 10-15 percent of gross wages for both employees and employers (Table 3). In addition to contributions, pension spending is financed through budget transfers aimed at covering the deficit of the pension system. The federal government is obliged to cover up to one third of the deficit in the private sector pension system. The deficit in the private sector pension schemes is currently equivalent to around 2½ percent of GDP, whereas the deficit in the civil servant schemes is about 3 percent of GDP. Of course, there is no a priori resason for a public pay-as-you-go system to be balanced at all times. Deficits covered by general taxation are in principle consistent with the concept of solidarity among generations underlying the Austrian pension system.

Table 3.

Austria: Gross Wage Contribution Rates

Source: BMSG.

Table 3.

Austria: Gross Wage Contribution Rates

	Employee	Employer
Private employees	10.25	12.55
Self-employed	…	15.00
Farmers	…	14.50
Civil servants	…	12.55

Source: BMSG.

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Table 3.

Austria: Gross Wage Contribution Rates

	Employee	Employer
Private employees	10.25	12.55
Self-employed	…	15.00
Farmers	…	14.50
Civil servants	…	12.55

Source: BMSG.

B. Health Care System

Delivering health care services to the population is primarily a public task in Austria. The Austrian Constitution stipulates that the responsibility for almost all areas of health care lies with the federal government. The most important exception concerns hospitals, where the federal government is only responsible for determining the basic legal framework and applying sanitary standards, while all other legislation and management is the responsibility of the nine Länder (provinces).

Public health insurance is compulsory and practically all Austrians are covered. People do not have the option to choose their own insurance scheme, but are assigned according to their professional background. Like pension schemes, public health insurance schemes can be divided into three main groups for (1) dependent employees, (2) self-employed and farmers, and (3) civil servants. Around 80 percent of the insured belong to the first group, and each of the other two covers around 10 percent of the insured. Health insurance covers against illness, inability to work due to illness or pregnancy, and preventive health care services. Benefits are primarily in kind, but there are also a number of cash benefits.

Public health care spending in Austria is comparable to that in other industrialized countries. In 2000, spending was around 5 percent of GDP (excluding long-term care spending), which is close to the EU average (Table 4). Health insurance contributions and general tax revenues finance the bulk of spending, but private households also provide some copayments, user fees, etc. Contribution rates to the different health insurance funds vary with the professions, and range from around 6-7 percent of gross earnings for white-collar workers and farmers (both employer and employee contributions) to around 9 percent for the self-employed. The contribution rates are determined by law and take into account the finances of the individual funds.

Table 4.

Austria: Public Health Care Spending in EU in 2000

(In percent of GDP)

Source: EU Economic Policy Committee.

Table 4.

Austria: Public Health Care Spending in EU in 2000

(In percent of GDP)

France	6.2
Finland	6.2
Sweden	6.0
Ireland	5.9
Germany	5.7
Portugal	5.4
Belgium	5.3
Austria	5.1
Denmark	5.1
Spain	5.0
Italy	4.9
Greece	4.8
Netherlands	4.7
United Kingdom	4.6
EU (weighted average)	5.3

Source: EU Economic Policy Committee.

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Table 4.

Austria: Public Health Care Spending in EU in 2000

(In percent of GDP)

France	6.2
Finland	6.2
Sweden	6.0
Ireland	5.9
Germany	5.7
Portugal	5.4
Belgium	5.3
Austria	5.1
Denmark	5.1
Spain	5.0
Italy	4.9
Greece	4.8
Netherlands	4.7
United Kingdom	4.6
EU (weighted average)	5.3

Source: EU Economic Policy Committee.

C. Long-Term Care System

Long-term care in Austria is less institutionalized than in many other comparable countries. Families play a relatively larger role in caring for their elderly relatives and a significant share of the elderly receiving long-term care live at home. The central and local governments are responsible for the provision of transfers or services to ensure that the elderly and others in need can receive the necessary care.

All citizens have a right to long-term care if they are considered in need of basic care or domestic help, regardless of their age and without being subject to a qualifying period. Long-term care consists of both cash benefits and benefits in kind provided by public and private suppliers. Cash benefits are determined by the extent of care needed, and are intended to provide the recipients with the necessary means to buy social assistance, but are not earmarked, means-tested, or subject to income tax. Benefits in kind comprise home care services, semi-stationary care in care facilities (i.e., day centers), and inpatient care in nursing homes, etc. Around 4 percent of the population is currently in need of in-kind assistance (care) and qualify for cash benefit care allowances.

Compared to other industrialized countries, spending on long-term care in Austria is relatively low. Spending on long-term care is financed by taxation and as a share of GDP was around 0.7 percent in 2002, which compares to a weighted average of 1.3 percent for a selected group of EU countries (Table 5). However, given that some long-term care is provided through the health system and is consequently included in health care spending, the official figure for long-term care likely underestimates actual spending.

Table 5.

Austria: Public Long-Term Care Spending in EU in 2000

(In percent of GDP)

Source: EU Economic Policy Committee.

Table 5.

Austria: Public Long-Term Care Spending in EU in 2000

(In percent of GDP)

Denmark	3.0
Sweden	2.8
Netherlands	2.5
United Kingdom	1.7
Finland	1.6
Belgium	0.8
France	0.7
Ireland	0.7
Austria	0.7
Italy	0.6
EU (weighted average)	1.3

Source: EU Economic Policy Committee.

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Table 5.

Austria: Public Long-Term Care Spending in EU in 2000

(In percent of GDP)

Denmark	3.0
Sweden	2.8
Netherlands	2.5
United Kingdom	1.7
Finland	1.6
Belgium	0.8
France	0.7
Ireland	0.7
Austria	0.7
Italy	0.6
EU (weighted average)	1.3

Source: EU Economic Policy Committee.

A. Sustainability in Theory and Practice

Theoretical discussion of fiscal sustainability is typically based on the assumption that the government must satisfy both a static and intertemporal budget constraint (Chalk and Hemming, 2000). Assuming a closed-economy representative agent model and abstracting from monetary conditions, the static budget constraint or every-period condition is

where B_t and B_t+1 are the initial and subsequent-period nominal government debt levels, respectively, 1+r_t is the nominal discount factor between the two periods, and PD_t is the nominal fiscal primary deficit. To derive the intertemporal budget constraint, (1) needs to be solved forward to give

where $D(t,t+i)={\displaystyle \prod _{k=0}^i(1+r_{t+k})}$ is the discount factor between periods t and t+i.

According to the intertemporal budget constraint, fiscal sustainability is secured if the present value of future primary balances exceeds the difference between the present value of the terminal and the initial debt level. If the level of outstanding debt grows at a rate less than r, then the present discounted value of the terminal debt converges to zero over time.

Therefore, assuming (3) is fulfilled, the government’s intertemporal budget constraint holds if the excess of primary surpluses over primary deficits, in present value terms, matches the outstanding value of initial debt. This gives what is usually referred to as the government’s present value budget constraint

Putting it more simply, (4) says that a government that has outstanding debt must anticipate sooner or later to run primary budget surpluses, and those surpluses have to be large enough to satisfy (4).

This theoretical concept of sustainability is, however, difficult to apply due to the assumption of an infinite time horizon. Practical applications of the concept of sustainability are based on finite horizons, which also means that the present value of the terminal debt level will normally be larger than zero and (3) will consequently not hold. Sustainability, as a result, boils down to preferences/targets for the end-horizon debt level, typically measured relative to output.

A number of indicators have been developed as tools to assess public finance sustainability. Buiter (1985) argued that a sustainable fiscal policy should maintain the ratio of public sector net worth to output at its current level. To assess fiscal sustainability, Buiter suggested an indicator comparing the current primary deficit to the deficit ensuring the stabilization of net worth. However, despite its intuitive appeal, Buiter’s indicator has the problem that it is difficult to obtain accurate information on the net worth of the government. Blanchard (1990) circumvented this problem by looking at the primary deficit or tax rate necessary to maintain the current debt ratio. Blanchard’s primary gap indicator is calculated as

where $b_t=\frac{B_t}{Y_t}$ is the debt-to-output ratio. A positive value of the primary gap indicator suggests that the current primary deficit is sufficiently small (or the surplus sufficiently large) to stabilize the debt ratio, while the opposite is true for a negative value.

B. Long-Term Sustainability Indicator for Austria

The indicator developed in this paper to gauge the long-term sustainability of Austria’s public finances is built on the primary gap indicator suggested by Blanchard. Specifically, the indicator compares the average annual primary deficit ${\overline{\mathit{\text{pd}}}}^1$ implied by the projected debt ratio in 2050 $b_{50}^p$ with the average annual primary deficit $\overline{\mathit{\text{pd}}}$ necessary to maintain the debt ratio at the current or targeted level. The average primary deficit implied by the projected debt ratio is given by

where g_a is the average annual growth rate for the entire forecasting period, and b_s and $\overline{r}$, respectively, are the debt ratio at time s (1≤ s ≤ 50) and the fixed interest rate. The equation says that the present value of the average implied primary deficit (discounted by GDP growth) equals the difference between the initial debt ratio and the present value of the terminal debt ratio (discounted by GDP growth). The implied deficit increases with the relative size of the terminal debt level and—for given initial and terminal debt levels— decreases with the spread between the interest and growth rate.

The primary deficit necessary to maintain the debt ratio at the current or some “target” level is given by

Combining (6) and (7) and rearranging gives the long-term primary gap indicator developed in this exercise for Austria:

A positive value indicates that the long-term projected fiscal policy is on a sustainable path, while a negative value indicates that projected primary balances are insufficient to keep the terminal debt ratio on target. The absolute size of the gap shows how much the primary balance at time t=s would need to be permanently adjusted to maintain the terminal debt ratio below the current ratio or some other “sustainable” debt ratio target.

Calculations of the long-term primary gap for Austria are carried out for the scenarios presented earlier and under different assumptions about the timing of the adjustment (see below). The calculations show at different points in time the primary balance improvement necessary to keep the debt ratio in 2050 less than or equal to a 60 percent level, assuming that the total required adjustment is undertaken once-and-for-all at the given point in time. This, of course, is not the only possible policy option. There is an infinite number of primary balance time profiles that could achieve the terminal debt level target in each scenario. The objective could for example be reached by initially adjusting the primary balance by less than suggested by the long-term primary gap indicator and later adjust it further. But in this case, the cumulative adjustment over the long term would need to be greater than an immediate once-and-for-all adjustment. For this reason, although the long-term primary gap indicator does not have an immediate prescriptive value, it is useful indicator of the cumulative effort required over the period to reach the target terminal debt level.

The calculations highlight the need for an immediate improvement in the primary fiscal balance. They show (Figure 7) that the size of the required primary adjustment depends heavily on the assumption about the success of reforms already underway, as well as on the timing of the adjustment. Even under fairly optimistic assumptions about reform success (scenario 1), the primary balance still needs to be raised permanently from next year onward by around 0.5 percentage point of GDP. If action is delayed to 2020, the required permanent adjustment rises to 1 percentage point. In the staff’s baseline scenario (scenario 3), the primary balance needs to be raised permanently by around 2 percent of GDP if the entire adjustment was undertaken in 2003 to achieve a debt ratio of 60 percent in 2050. Delaying the adjustment to 2015 increases the required improvement to 3 percentage points. In the event health and long-term care costs increase by more than expected (scenario 4), the required adjustment is even higher.

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Austria: Required Permanent Primary Adjustment with Different Timings for Adjustment

(In percent of GDP)

Citation: IMF Working Papers 2002, 216; 10.5089/9781451875096.001.A001

Source: Author’s calculations.

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The analysis underscores the need for time consistency in fiscal policy. The calculations presented above assume that the authorities keep to the new primary balance path for the rest of the period. Deviations from this path could seriously worsen the outlook and increase further the primary adjustment required to ensure achievement of the terminal debt ratio and, hence, public finance sustainability. This emphasizes the importance of adhering to the chosen fiscal path over the long term. Finally, it should be pointed out that the primary adjustment requirement calculated for all the scenarios only ensures that the terminal debt ratio is equal to 60 percent in 2050. This, however, is not sufficient to guarantee that the debt ratio is not increasing at an unsustainable rate at that time. Depending on the specific primary balance path during 2003-2050, additional adjustment may, therefore, be necessary to ensure debt sustainability after 2050.