The pension system in Austria sounds like paradise to German ears. Over 70 percent pension level, retirement age 65 – what is the country really doing? And can Germany do that too? FOCUS online asked the Viennese pension expert Erik Türk.

FOCUS online: In Germany, the Austrian pension system is a role model. To what extent can the two systems be compared?

Erik Türk: The comparison actually makes sense. The systems were very similar up until the early 2000s and still have a lot in common – albeit at very different levels of performance now. In addition, both are pay-as-you-go social security systems. However, they have since moved in very different directions.

What was the initial situation in Germany and Austria like back then?

Türk: It was really quite similar in 2000, even if the entry levels were higher in Austria at that time, based on gross pensions. The German system then developed in such a way that the entitlements were massively withdrawn and a part of this withdrawal was deliberately to be funded by private provision. There were similar attempts in Austria at the same time, but they were fended off and the system was reformed in a completely different way.

Erik Türk is a consultant for welfare state affairs, old age security and welfare state financing in the social policy department of the Vienna Chamber of Labor. He has been dealing with the Austrian and German pension systems for years and has already published numerous analyzes and papers.

What was done differently in Austria than in Germany?

Türk: Our system has undergone massive changes over the past 20 years – towards a defined-benefit pension account, a later effective retirement age and the inclusion of civil servants. But the center remains a powerful, very efficient social security system with a clear target for performance. This leads to a very big difference in the level of performance compared to Germany.

Then please be specific: How is the pension level measured in Austria and how high is it?

Türk: Germany has an average gross pension level of 44 to 46 percent. This is significantly higher in Austria. If someone in Austria has earned the average income for 45 years and then retires at the standard retirement age, i.e. without deductions, at the age of 65, then they will receive a pension level of 77.6 percent.

That is actually a lot more than in Germany. What are the other cornerstones of the system?

Türk: We have a defined-benefit pension account with the central benefit formula 80, 45, 65. In other words, you get a gross replacement rate of 80 percent based on the average lifetime income over your entire working life after 45 years of contributions if you retire at the age of 65, i.e. without deductions to the normal age .

And how do you arrive at a pension level of 77.6 percent using this formula?

Türk: This results from the fact that we credit the personal pension account with entitlements amounting to 1.78 percent of the contribution base every year – i.e. essentially from earned income. But if I bring up children, I also get a contribution base for it, just like if I am unemployed or receive sick pay. So every year that I’m part of the pension system, I get 1.78 percent credited to my benefit account up to the standard retirement age. That would be 80.1 percent after 45 years. In fact, it is a little less because the account credit has not been revalued in the last year. That’s why you’re practically at almost 78 percent.

In view of the current discussion about pension levels and contribution rates, that sounds like a lot to German ears. How can Austria afford that?

Türk: There are not only the adjusting screws contribution, pension level and age. This is often presented in a very abbreviated form. What is decisive for pay-as-you-go systems is not so much the ratio of older people to younger people than the ratio of employed people to people dependent on transfers – i.e. pensioners or the unemployed. It doesn’t help much if a younger person could be employed purely because of their age, but for whatever reason does not pay into the social system, but is dependent on social transfers themselves, for example because they are unemployed or in early retirement. And there are many ways to make these routes cheaper. On the one hand, it is about a high level of employment integration, not via mini-jobs or precarious employment, but via high-quality jobs. And on the other hand, you have to make sure that everyone who can is included in this system. This is where Austria differs greatly from Germany, because we actually integrate much more broadly than Germany. You are still strongly focused on dependent employees, without civil servants and the self-employed. In principle, all employees pay into the pension system – regardless of where they are employed or how they earn their money. This relation can also be used to counteract the demographic effect on the pension system.

Why did Austria choose this system?

Türk: Because we believe it is the best and by far the most reliable. With the level of 77.6 percent I have described, one must also bear in mind that this applies to an ideal-typical course. Most people fail to achieve this. Unemployment, illness, longer part-time phases, for example because of childcare, are quite typical. And often employees do not make it to the standard retirement age. That is why the pension levels for an ideal course or “standard pensioner” must be so high that a reasonable pension level also results from a realistic course.

That’s exactly the problem for Germany: many pensioners don’t have enough money.

Turk: Exactly. Even with an ideal-typical course, where someone really starts working at the age of 20 and is then continuously employed until the age of 65 or 67, one only has a very low entitlement in Germany if the earned income was not really high. 47.6 percent gross – that is problematic in itself and even more so, precisely because reality usually deviates from ideal-typical developments. Therefore, the starting value must be high so that everyone gets a pension from which they can live.

How long has Austria been working on reforming its pension system and what do you think were the most important reforms?

Türk: Similar to Germany, our pension system has long been the subject of heated debates. For us, too, the question is how can we adapt our systems so that they remain efficient in the long term. The key reform from my point of view was that in 2004-2005, which introduced the defined benefit pension account and at the same time provided for the involvement of civil servants. Not organizationally, because they still have their own system in terms of processing, but legally in terms of contributions and benefits. The same rights apply to public employees as to the self-employed, employees or farmers. Namely that of the statutory pension insurance.

The demand that civil servants should also pay into the pension insurance scheme also exists in Germany. For them, the system is completely unattractive in view of the high pension entitlements. How was the transition in Austria?

Türk: That wasn’t implemented from one day to the next. It is the case that the pension account applies exclusively to younger civil servants who started their civil service careers from 2005 and to those born after 1975, and there is a parallel calculation for older civil servants that mixes the two systems and gradually converts them. I think that was easier in Austria than in Germany, because the prospects for benefits in the statutory pension insurance are still good and reliable.

So would you say that such a reform would not have the same benefit in Germany? Even if we involve the civil servants, wouldn’t we be at a pension level of over 70 percent?

Türk: In Germany, not only were there hardly any efforts to expand the circle of insured persons, but there were also many countermeasures. Even those who pay in are no longer subject to social security contributions, for example with deferred compensation for the Riester pension. This is exactly the opposite of making as much of the earned income as possible available for retirement. In this way, the financing basis for the pension insurance is withdrawn, which leads to pension levels that understandably then no longer find broad acceptance. This makes it even more difficult to integrate officials into the system. On the other hand, if I promise good levels of performance, then it will also be easier for me to include groups that have not yet been included.

In Germany, this involvement of civil servants is rejected for many reasons, one of which is the supposedly higher risk for the pension insurance. What do you think?

Türk: The argument that including civil servants in the pension insurance scheme wouldn’t be a good idea because civil servants are “bad risks” due to their higher average life expectancy, is of course nonsense. In Vienna we would say that’s pure “Kastl-thinking”. It’s all about how much should be spent on annuities and pensions and how that can best be distributed. And if the group with by far the highest demands also has a higher life expectancy, this does not put the cost advantages of inclusion into perspective, but is an additional, strong argument for it.

The civil service pension is currently around 70 percent of the last salary. Even a pension level of 70 percent of the average income would be an extreme loss. How was it in Austria – were the losses just as big?

Türk: It was similar in Austria. For a long time, the reference figure was also the last income. But reforms began here at the end of the 1990s and gradually a calculation period was also introduced for civil servants. Germany, on the other hand, did not take such steps – as far as I know – with the last pension reforms, since the civil servants were left out further. However, the biggest difference is still that the Austrian pension insurance offers significantly better levels of benefits than the German pension insurance. So even if the Austrian civil servants lost their special position with the integration and had to accept cuts, they can still count on good and reliable pension levels.

And what is the development of retirement age versus pension level?

Türk: The pension level that I have described to you is that at the retirement age of 65 years, with earlier retirement age deductions are applied. This pension level also applies to young people. The benefit account exists and will continue to exist unless it is reformed to pieces. This means that these performance levels of around 78 percent will also apply in the future.

That all sounds very heavenly for you, but how secure is this financing in times of demographic change?

Türk: I wouldn’t describe a good and reliable old-age provision as paradisiacal, but rather as what working people should be entitled to. Although we have a higher share of pension expenditures in GDP than Germany, we have a development in perspective that can at least be described as financially sustainable. Pension expenditure is not shooting away for us, but it is temporarily increasing only very moderately despite significant aging and good and reliable insurance must be worth it to us.

The EU Commission has also drawn up calculations that show that the pension costs measured in relation to GDP in Austria will only be around half a percentage point higher in the long term than they are today. The following aspect of financial sustainability should also not be ignored. In Austria, the relationship between what you put in and what you get out is right. And when you see how good and stable the system is for today’s younger generation, it won’t be a problem to get broad approval for it, if need be, to spend a little more on it in the future. It is important that the development of expenditure remains within reasonable bounds and they are doing that.