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Financial incentives in the Austrian PAYG-pension system: micro-estimation

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Abstract

The scope of this paper is to investigate the impact of financial incentives on the retirement decision of private sector workers in Austria. How do financial incentives embedded in the Austrian pension system impact individual retirement behavior? We are using a unique dataset of individual social insurance spells. Micro-estimating the impact of financial incentives on the probability of retirement shows that the behavioral response to financial incentives in Austria is relatively large in international comparison. Also, there are striking behavioral differences between men and women. Using the estimates to simulate reform scenarios shows huge behavioral changes as incentives alter.

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Notes

  1. Looking at younger ages shows no big deviation of Austrian labor force participation rates from other countries according to ILO (2005). In the age group 40–44, Austria has a participation rate of 89%, Germany 89.6%, Sweden 90.6%, Switzerland 88.9%, US 84%, and Italy 80.3%. The rates for age group 45–49 are 87.4 (Austria), 88.6 (Germany), 89.6 (Sweden), 90.1 (Switzerland), 79.4 (US), and 77.3 (Italy).

  2. The pension law distinguishes between contributory (“Beitragszeiten”) and qualifying periods (“Ersatzzeiten”) in insurance coverage (“Versicherungszeiten”). Contributions are regularly paid during employment. Typical examples of qualifying periods are years of schooling, unemployment, military service, sick leave and maternity leave. Eligibility for the old-age pension requires 15 years of contributory service, or 15 years of insurance coverage over the last 30 years, or 25 years of insurance coverage over the whole life, whatever applies first.

  3. See Knell et al. (2006) for a detailed summary of pension reforms in Austria.

  4. Fields and Mitchell (1984) provide detailed comparative statics of the life cycle model.

  5. In Germany, disability pensions are also granted very generously. According to Boersch-Supan et al. (2004), 29% of German private sector workers retire on a disability pension, while only 20% retire statutorily. Moreover, 40% of German civil servants enter retirement on a disability pension.

  6. In order to determine the growth of earnings as age increases, we have to look at the age earnings profile in Austria. In contrast to many OECD countries, salaries in Austria grow according to seniority until retirement. This implies an age-earnings profile strictly increasing in age rather than being concave in age near-retirement as described on page 129 in OECD (2005) Also, all wage increases are bargained on the federal level by labor unions and employer organizations of an industry. Consequently, all employees in an industry will have an identical salary growth rate. Under these circumstances, the “best 15 years” for pension computation are most likely to be the last 15 years before retirement. We will therefore, adopting the method portrayed in Brugiavini and Peracchi (2004), and on page 300 in Hofer and Koman (2006), assume that earnings pre-1997 and prospective future earnings between 1998 and 2004 grow at the annual aggregate growth rate of earnings as found in Austrian Chamber of Commerce (2007).

  7. We assume that all temporary labor force exits come from pension relevant qualifying times (“Ersatzzeiten”) like maternity leave, unemployment, military service, sick leave, rehabilitation leave, and education. Then, these temporary withdrawals enter into the replacement rate.

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  1. Irish Centre for Social Gerontology/Department of Economics, National University of Ireland Galway, University Road, Galway City, Ireland

    Roman Raab

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Raab, R. Financial incentives in the Austrian PAYG-pension system: micro-estimation. Empirica 38, 231–257 (2011). https://doi.org/10.1007/s10663-010-9134-3

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