Ziegler Research Report Oct 2013 Occupational Pension Choice in a System of Organized Capitalism

7/17/2019 Ziegler Research Report Oct 2013 Occupational Pension Choice in a System of Organized Capitalism

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Occupational Pension Choice in a System of Organized Capitalism:Austria in Comparative Perspective

A Report Submitted to the Austrian Marshall Plan FoundationOctober !"#

$% &icholas 'iegler(niversity of California) *er+eley

,his paper places the evolution of Austrian pension politics in the larger conte-t ofcomparative economic change in .estern /urope over the last t0o decades%.ithin these larger economic shifts) the tensions bet0een mar+et e1ciency andnon2mar+et forms of social protection represent a +ey dimension of political debate%As a nearly paradigmatic e-ample of 3organized free enterprise)4 the Austrian caseis highly illustrative of the tensions facing many Continental economies% At thesame time) Austrian institutions allo0 for several uni5uely Austrian 0ays of

responding to contemporary challenges% Among the changes facing the Austrianeconomic and political establishment) the development of funded occupationalpensions is particularly illuminating%

,he concept of organized free enterprise) originally from Andre0 Shon6eld7s 0or+on the mi-ed economy) has been developed by a distinguished lineage ofcomparative political economists in the last 8! years 9Shon6eld) ";8<% =t no0refers to economies 0here the state and the organized social partners playprescribed roles that result in 0ell2+no0n economic tendencies: long2terminvestment) a highly trained 0or+forces) gradual technical change) and e-tensivepolicies for social protection% ,hese characteristics di>er from the more open2endedpatterns of politics in the Anglo2American countries that are associated moreconsistently 0ith short2term investment horizons) variable 0or+force 5uali6cations)more radical patterns of technological innovation) and more selective policies forsocial 0elfare%

One of the more 0idely adopted frame0or+s in recent literature on comparativecapitalisms is the so2called 3?arieties of Capitalism4 perspective developed by Peter@all and avid Sos+ice% According to the ?arieties 9?oC< approach) the centralcharacteristic of the more organized variants of capitalism lies in employercoordination) 0hich leads @all and Sos+ice to designate such countries ascoordinated mar+et economies 9CM/s<% =t is this high level of employercoordination that in turn leads to patient capital) medium and long2term investmentin e-isting s+ill systems) corresponding tendencies to0ard incremental rather thanradical technological innovation) and structured bargaining 0ith organized laborover social 0elfare policies% ,he central 5uestion for the CM/s is 0hether pressuresto0ard more open mar+et competition 0ill o>er individual 6rms opportunitiesoutside their national economies that unravel the very patterns of coordinationamong CM/ employers that have enabled them to maintain their long2term andhigh 5uality strategies for 6tting into the international economy% =t is precisely onthis 5uestion B the viability of the more coordinated mar+et economies in a globalmar+etplace B that Austria provides particular insights%



=n enumerating these insights) this paper proceeds in four steps% First) it lays outthe implications of employer coordination for social 0elfare policy in the moreorganized forms of advanced capitalism% Second) it summarizes recent changes inAustria7s patterns of coordinated policyma+ing 0ith an emphasis on pension reformas an e-emplary case% ,hird) it revie0s Austria7s e-perience 0ith occupational

pensions 0ith comparative reference to other Continental /uropean cases) inparticular ermany% Fourth) it concludes 0ith several 5uestions raised by theevolution of occupational pensions regarding Austria7s broader capabilities foradDusting to the changing terms of international competition%

=% /mployer coordination and the 0elfare state%

According to the ?oC approach and other perspectives on comparative capitalism)employer coordination can be associated either 0ith the Scandinavian model ofuniversal 0elfare bene6ts or the conservative Continental model of theoccupationally de6ned 0elfare bene6ts% At a general level) both of these 0elfare

state models emerge from neo2corporatist patterns of policyma+ing in 0hichcentralized business associations negotiate 0ith trade union federations accordingto the practices of social partnership% Eet) according to the typology advanced bysta /sping2Andersen) the results fall into t0o broadly di>erent categories of socialpolicy% =n short) there are t0o types of 0elfare capitalism 0hich feature high levelsof 0hat the ?oC school calls employer coordination% ,he Scandinavian modelprovides an egalitarian social safety net on universalistic criteria by virtue ofcitizenship% ,he conservative Continental model) sometimes termed the male2bread0inner model) provides a more di>erentiated social safety net that e-tendsstatus2preserving bene6ts to individuals according to their occupation and 0or+history 9/sping2Andersen) "!<%

,he distinction bet0een the Scandinavian and the Continental models is particularlysigni6cant 0ith respect to the lin+ bet0een 0or+force 5uali6cations and old2agesecurity% ,he Scandinavian model tends to enable a high level of 0or+force5uali6cation across all occupations 0ith universally high retirement bene6ts basedon citizenship% According to the ?oC approach) the Continental model supports highlevels of 5uali6cation only in particular occupations% ,he evidence for thisdi>erence comes particularly from ermany) 0here e-tensive investment inindustrial apprenticeship at the beginning of an individual7s career is compensatedthrough relatively high industry2speci6c pension guarantees in old age 9/stevez2Abe) et% al) !!"G Mano0) !!8<% ,hese industry2speci6c patterns result from apublic pension system that pegs retirement bene6ts to career long compensationlevels) supplemented in many cases by di>erential pension schemes for employeesin broad occupational categories such as: public service) the liberal professions) thecraft trades) or private business in many individual 6rms% Although in di>erentproportions) Austria) li+e ermany) provides old age bene6ts primarily through itspublic system 0ith some supplementary bene6ts paid from occupational sources%

=t is 0ell +no0n that all of the CM/s) including both the Scandinavian and theContinental countries) have e-perienced increasing pressure on their public pensionsystems since the "H!s% As a result) di>erent countries have e-perimented 0ith a



range of policy measures for broadening the usage of occupational pensions as 0ellas individualized or private pensions% ,he relative gro0th of these di>erentcategories of old2age provision have stri+ing implications for several irreduciblypolitical 5uestions% Since the public pension systems are 6nanced throughintergenerational transfers) their 6nancial health is a maDor factor in any country7s6scal health% ,he gro0th of occupational and individual pensions implies an

increasing individualization of ris+ in old age% ,he relative strength of occupationalpensions may in turn alter the +inds of educational investments that individuals canma+e as a function of di>erential prospects for old2age security in di>erentprofessions% Occupational pensions) if negotiated through collective bargaining) canalso inIuence the robustness of trade unions7 ties to their membership% And thegro0th of funded pension accounts 9termed de6ned2contribution pensions in /nglishparlance) kapitalgedeckte in erman< can have a signi6cant impact on themagnitude of any country7s capital mar+ets%

==% Recent changes in Austrian pensions%

Austria has navigated the pressures that bear on all advanced countries through a

series of pension reforms% Ji+e those of other Continental 0elfare states) Austria7spension system relied on a public pay2as2you2go 9PAEO< system for theover0helming proportion of bene6ts paid to retirees% Since this proportion reachedabove nine2tenths of all Austrian pension bene6ts as late as the early !!!s) anyerosion of the pay2as2you2go mechanisms of intergenerational 6nancing posed amaDor political problem% &ot surprisingly) from "H! through !!!) there 0erenumerous legislative e>orts to put the public system on sound 6nances% Mostobservers agree that these reforms B 0hich centered on recalibration of bene6ts orchanges to the contribution rates for di>erent classes of bene6ciaries B fell short offundamental change 9Schulze and Schludi) !!K) 888288;<% One particularchallenge) 0hich these reforms addressed only at the margins) 0as the prevalenceof early retirement practices) 0hereby men 0ere permitted to retire at age ;!)0omen at age 88% =n periods of high unemployment) 6rms 0idely encouraged earlyretirement as a 0ay of ma+ing room for younger and more recently educatedemployees to enter the 0or+force%

,he pension reforms of !!!) !!#) and !!L28) introduced more signi6cantalterations) after a sea change in government in !!! brought a ne0 coalitionbet0een the center2right Austrian People7s Party 9?P< and the far2right AustrianFreedom Party 9FP<% ,he reform of !!! raised the ages at 0hich early retirement0as permitted by "%8 years% =t also aimed at actuarial fairness by imposing reducedaccrual rates on early retirees 0hile granting additional credits to people 0or+ingbeyond the statutory retirement age of ;8 for men) ;! for 0omen 9Schulze andSchludi) !!KG Paster) !"#<%

,he reform of !!# altered the underlying parameters of the public pension systemby gradually e-tending the base period for calculating bene6ts from "8 years to L!years of an individual7s employment history% =n addition) the e-pected replacementrate 0as lo0ered by changing the credit per year of 0or+ history from N to "%KHN%=n addition) the special contribution rate for civil servants 0as abolished% And theaccrual penalty for early retirement 0as increased from #N per year to L%N peryear) 0hile the allo0able age for early retirement 0as to be gradually raised% ,his



reform) li+e that of !!!) 0as engineered by the center2right coalition against theopposition of the Social emocrats 9SP<) the trade unions) and the AustrianChamber of Commerce 9.irtschafts+ammer sterreich) .<) 0hich all consideredthe changes too abrupt or far2reaching 9nell) et% al%) !!;G Paster) !"#<%

,he reform of !!L consolidated some of the changes from !!# and introduced

others% ,he accrual pension credits at the rate of "%KHN per year of 0or+ 0asformalized in the L82;82H! rule) indicating that a retiree at age ;8 0ho had 0or+edL8 years 0ould receive H!N of the average salary over their entire employmenthistory% =n addition) the preferential payroll deductions for the self2employed 9"8Nto "K%8N) depending upon sector<) farmers 9"L%8N<) and the liberal professions9!N< 0ere harmonized on the same contribution rate of %HN for all occupationalgroups 9Schulze and Schludi) !!K: 8;G nell) !!;: K8G Paster !"#: "#<% =naddition) a small individualized de6ned bene6t 0ithin the public system 0asestablished for individuals born in "88 or later years 9nell !!;: KL<%

As a result of the more radical reforms introduced by the ?PFP coalitiongovernments) the &ational *an+ estimated that pension e-penditures 0ill decline

from one of the /uropean (nion7s highest levels at "#%LN of P in !!L to "%Nin !8!% .hile this change should) according to modeling proDections) ma+e thepublic system sustainable) it does so at the cost of decreased retirement incomelevels for most groups of future pension bene6ciaries 9nell) !!;: K) K;) "2<%

===% Occupational pensions in Austria

,he combination of increased sustainability for the system and predictably lo0erlevels of anticipated bene6ts for individual households is the +ey reason thatpolicyma+ers have tried so consistently in recent decades to 6nd additional meansof broadening household income for retirees% iven the predominant role of thepublic pension system in Austria) both occupational and individual pension accountshave long been left to the realm of voluntary choice by 6rms as 0ell as individuals%

,he relatively high replacement rates provided by the public system 22 up to H!N ofaverage compensation for most 0or+ers B has over time generated little demand foroccupational and individual pensions% Public o1cials have accordingly ta+en theinitiative) 0hile recalibrating the pubic pension system through the reforms outlinedabove) to introduce changes to the legal frame0or+ for occupational as 0ell asprivate pensions% =n "!) a ne0 la0 on occupational pensions and pension funds9Pensionskassengeset z) P< established a ne0 option for occupational pensionsthat could be serviced and invested through e-ternal 6nancial 6rms% ,his plan 0asintended to encourage 6rms to o>er occupational pensions more fre5uently thanthrough the traditional modalities of company reserves or group insurance policies)0hich had been used 0ith declining fre5uency in the "H!s% A ne0 portabilityfeature also 6tted 0ith an increase in labor mar+et mobility because individualscould ta+e their pension funds 0ith them if they s0itched Dobs 9*mAS) !"") #2L<%



Occupational pensions gre0 further in prevalence in !!) 0hen a ne0 frame0or+for severance pay came into force% ,his ne0 frame0or+ re5uired employers to setaside "%8#N of the gross monthly compensation for all employees) 0ho could thenchoose bet0een a lump2sum or an annuitized pension 0hen they retired 9nell) et%al%) !!;) K!2K"<%

.ith these changes) three main organizational schemes 9Durchführungswege< 0ereavailable to 6rms that 0anted to o>er occupational pensions in Austria: pensionfunds) group life insurance arrangements) and direct pension commitments paid byemployers% ,hough starting from a comparatively lo0 level) occupational pensionsin Austria gre0 noticeably more prevalent after !!! as indicated by the number ofeligible employees) the number of current retirees) or the number of 6rms o>eringsuch pensions% ,hese indicators B trac+ed in a series of studies by ,homas (rl B arebrieIy enumerated here%

=n the year !!!) appro-imately "N of the potential 0or+force 0as entitled tosome +ind of occupational% *y !!H) this 6gure had gro0n to appro-imately N ofthe 0or+ing age population) including over #!N of the actually employed 0or+force

in the non2agricultural economy 9(rl) !"!: #!) #L for a range of estimates<%

,he number of retirees receiving occupational pension payments totaled only about"#8)!!! in the year !!K% ,his number included roughly ;!)!!! bene6ciaries ofpension funds) another "#)8!! 0ith group life insurance annuities) andappro-imately ;!)!!! receiving direct company pensions 9(rl) !"!: #"<% ,hesenumbers climbed rapidly in the ne-t t0o years) o0ing partly to more favorable ta-treatment of group life insurance schemes and a rapid increase in the number ofinstitutions in public service) education) and health that provided such retirementschemes 9(rl) !"!: #!) and see also *mAS) !"": ;) #!) ##) for increasingnumbers of retirees) !!K2!!<%

According to surveys conducted by .=FO 9the Austrian =nstitute for /conomicResearch<) the number or 6rms across all sectors that o>er occupational pensionshas also gro0n conspicuously in recent decades% From an estimated ;%"N of 6rmsin "#) the number of 6rms 0ith occupational pensions schemes gre0 to "%;N in!!!) and "%N in !!K) 0ith some estimates e-ceeding !N for subse5uentyears 9(rl) !"!: #!2#"<% .hile these numbers establish a clear pattern of rapiddi>usion of occupational pension schemes) they conceal signi6cant variation acrosssectors% =n !!K) occupational pensions 0ere o>ered by more than !N of theemployers in three sectors: 6nanceG educationG and health% Slightly more than8!N of the employers in t0o other sectors o>ered such bene6ts: publicadministration and utilities% Mean0hile occupational pensions 0ere available fromless than 8N of the employers in maDor branches of the industrial economy:miningG manufacturingG and commercial trade in goods) both 0holesale and retail%Mean0hile) fe0er than "!N of the employers in t0o other sectors o>eredoccupational pension schemes: construction and the hospitality industry) includingboth hotel and restaurant 9(rl) !"!: #"<%

espite this recent gro0th in the availability of occupational pensions) pensionbene6ts in Austria 0ill for the foreseeable future continue to come primarily fromthe public PAEO system% ,his tendency is particularly clear) for e-ample) by



comparison to other Central /uropean countries% =n ermany) for e-ample) recentsurveys sho0 that over K!N of employers o>er some +ind of occupational pension9*lan+ and .iece+) !": Figure #) page H< B more than t0ice the incidence ofAustrian 6rms% As a result) such pension schemes are available much more evenlyacross the public sector and private industry) 0ith as many as t0o2thirds of the6rms in the metal0or+ing industries 9industrial and consumer goods< o>ering

occupational pension schemes in ermany 9*lan+ and .) Figure ) page ;<) 0hile inAustria fe0er than one fourth of the 6rms in the manufacturing sector o>er suchschemes%

=?% Analysis and Conclusions%

,hese 6ndings indicate that Austria faces of number of challenges) 0hile possessinga range of strengths as it prepares to provide for its retired population%

,he central challenge stems from the large number of employers that do not o>eran occupational scheme for complementing the public system already available to

their employees for old2age security% .ith 0ell under half of Austrian 6rms o>eringoccupational retirement schemes) there is much room for gro0th in this type ofpension savings 9Rauscher2.eber) !"#<%

,his challenge is more than a matter of numbers% ,he current distribution ofoccupational schemes for old2age security in Austria is heavily s+e0ed to0ard non2e-port sectors: public administration) education) health services) and businessservices% ,his pattern suggests that end2of2career security is not being enhancedin proportion to the need for the highly25uali6ed 0or+force on 0hich countries li+eAustria have customarily depended% According to the insights of comparativeinstitutional analysis) highly organized economies such as Austria7s depend onmutually reinforcing vocational and social policies% ,he adaptability of vocationaltraining depends largely today on university2level training in applied pursuits) or0hat is often called tertiary vocational training% Studies indicate that the gro0th ofthis type of advanced vocational education has occurred far less 5uic+ly in Austriathan comparable Central /uropean countries) for e-ample) S0itzerland 9Culpepper)!!K<%

,he same mutually reinforcing e>ects of di>erent policies that present a challengeto Austrian policyma+ers) ho0ever) also point to the country7s inherited strengths inresponding to changing demographic and competitive conditions% Comparativeinstitutional analysis sho0s clearly that unrestrained Ie-ibility across the entireeconomy does not provide a solid foundation for competitive adDustment strategiesat the level of individual 6rms or employees% Precisely because the more organizedor coordinated mar+et economies depend upon mutually complementaryinstitutions) inherited arrangements should be vie0ed as potential resources% Morespeci6cally) in the Austrian case) t0o underlying institutions provide essentialelements of adaptability%

,he public pension system itself) even as it is altered through legislative reform)provides an invaluable mechanism for spreading the ris+ of old2age poverty% =nparticular) the public pension system supplies a basic 6nancial foundation at the



household level for all retired Austrians% ,he value of the public PAEO system hasbeen vividly revealed by the 6nancial turbulence of the last 6ve years% ,he 6nancialcrisis and stoc+ mar+et declines of !!H severely undercut the balance of all e5uity2based accounts and thereby undermined public con6dence in funded or de6ned2contribution pension schemes% Since then) the lo0 interest rates adopted by centralban+s around the 0orld have 0ea+ened the 6nancing of insurance2based pension

schemes and in many cases reduced annuity2based bene6ts%

=n these circumstances) the indispensability of the public PAEO system hasemerged more clearly than ever% As a result) it is easy to see that occupationalpensions do not represent a panacea% =f they can be e>ectively layered on top ofthe public system) ho0ever) occupational pensions can provide a tool for particular6rms and industry groups that are bringing their old2age security frame0or+s intoline 0ith their competitive needs% =n particular) this form of 6rm2 and industry2leveldecision can provide an element of Ie-ibility in matching old2age securityguarantees to the other +inds of inputs) particularly human capital in the form ofearly2career vocational training) that 6rms need to maintain in order to addresstheir speci6c competitive environments e>ectively%

Precisely because the capabilities of competitive 6rms rest Dointly on their o0n 6rm2internal resources and resources provided from public sources) a secondinstitutional resource of great importance for Austria7s economic adDustmentstrategies is the chamber system of business organization and the Austrian Federal/conomic Chamber 9.< in particular% ,he pea+2level chamber in ?ienna plays anaggregating role that fe0 other national business associations can play% *ecausemembership is legally re5uired) and because the . includes small 6rms as 0ellas large enterprises across all sectors) the . is uni5uely able to integrate 0idelyvarying preferences into its positions% ,his organizational breadth is crucial becauseit gives Austrian policyma+ers a single organization that can bring the needs of6rms in 0idely varying sectors and business circumstances to bear on nationalpolicy decisions 9Paster) !"#<% =t is precisely the articulation of highly diversestrategies at the 6rm2level 0ith economy20ide public policies that can produce themost advantageous circumstances for 6rms as they see+ to respond to the rapidlychanging conditions of the contemporary international economy%



R/F/R/&C/S

*ispinc+) Reinhard) 3Qberblic+ ber tariIiche Regelungen zur Altersvorsorge aus!!")4 .S= =nformationen zur ,arifpoliti+ 9@ans *c+ler Stiftung) February !!<%

*ispinc+) Reinhard) 3Sozial2 und arbeitsmar+tpolitische Regulierung durch ,arifvertrag) in *ispinc+) Reinhard) erhard *osch) laus @ofemann) erhard&aegele) eds%) erhard *Tc+erUForscher) Jehrer und *erater zu Sozialpoliti+ undSozialstaat 9.iesbaden: ?S ?erlag fr Sozial0issenschaften) !"<%

*lan+) Florian) and Sabrina .iece+) 3ie betriebliche Altersversorgung ineutschland: ?erbreitung) urchfhrungs0ege und Finanzierung4 9.S=is+ussionspapier &r% "H") !"<%

*mAS 9*undesministerium fr Arbeit) Soziales und onsumentenschutz<)*etriebliche und private Altersvorsorge in sterreich: urchfhrungs0ege undosten fr die >entliche @and 9?ienna: *mAS) !""<%

Culpepper) Pepper) 3Small States and S+ill Speci6city: Austria) S0itzerland) and=nteremployer Cleavages in Coordinated Capitalism)4 Comparative Political Studies)L!:; 9!!K<: ;""2;#K%

/bbinghaus) *ernhard) ed%) ,he ?arieties of Pension overnance: PensionPrivatization in /urope 9&e0 Eor+: O-ford (niversity Press) !""<%

/bbinghaus) *ernhard) and ,obias .iV) 3,he overnance and Regulation of PrivatePensions in /urope)4 in /bbinghaus) ed%) ,he ?arieties of Pension overnance:Pension Privatization in /urope 9&e0 Eor+: O-ford (niversity Press) !""<%

/sping2Andersen) sta) ,he ,hree .orlds of .elfare Capitalism 9Princeton:Princeton (niversity Press) "!<%

/stevez2Abe) Margarita) ,orben =versen) and avid Sos+ice) 3Social Protection andthe Formation of S+ills: A Reinterpretation of the .elfare State)4 in @all andSos+ice) eds%) ?arieties of Capitalism: ,he =nstitutional Foundations of ComparativeAdvantage 9O-ford: O-ford (niversity Press) !!"<%

@all) Peter A%) and avid Sos+ice) eds%) 3An =ntroduction to the ?arieties ofCapitalism)4 ?arieties of Capitalism: ,he =nstitutional Foundations of ComparativeAdvantage 9O-ford: O-ford (niversity Press) !!"<%

=mmergut) /llen) aren M% Anderson) and =sabelle Schulze) eds%) @andboo+ of .est/uropean Pension Politics 9O-ford: O-ford (niversity Press) !!K<

nell) Mar+us) .alpurga holer2,glhofer) and oris Prammer) 3,he AustrianPension System B @o0 Recent Refroms @ave Changed Fiscal Sustainability andPension *ene6ts)4 Monetary Policy and the /conomy 9?ienna: &ationalban+) W)!!;<%



Mano0) Philip) 3.elfare State *uilding and Coordinated Capitalism in $apan andermany)4 in .% Streec+ and % Eamamura) eds%) ,he Origins of &onliberalCapitalism: ermany and $apan in Comparison 9=thaca: Cornell (niversity Press)!!8<%

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Organization of =nterests Shapes *usiness Attitudes ,o0ard Social Partnership)4Comparative Political Studies ) $une !"#%

Rauscher2.eber) Magdalena) 3.ifo2/-perte (rl: Muessen die (nternehmer ins *ootholen)4 .irtschafts *latt) October !"#%

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Alternative Pension Reforms on the Austrian /conomy)4 /con .PS) .or+ing Papersin /conomi theory and Policy) &o% !L!"% ?ienna (niversity of ,echnology) !"%

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(rl) ,homas) 3Occupational Pension Systems in Austria !!K)4 Austrian /conomicWuarterly 9"!"!<: 82#;%

Ziegler Research Report Oct 2013 Occupational Pension Choice in a System of Organized Capitalism

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Transcript of Ziegler Research Report Oct 2013 Occupational Pension Choice in a System of Organized Capitalism