Reform Scenarios for a Long-term Sustainable NDC Pension System in Austria

Public pension systems face a financing challenge over the long run, as population is aging. One benefit of Notional Defined Contributions (NDC) pension systems is that their financing is sustainable by design, as they equalize average lifetime social security contributions with average lifetime pension benefits, even when population is aging. Using an overlapping-generations model with endogenous labor supply decisions, three skill levels and skill-dependent mortality, this report investigates reform options for the implementation of a NDC system in Austria. Adjustments to implement a NDC system would be significant, even under a constant population: the social security contribution rate for low-skilled workers would need to be increased more than 7 percentage points, their pension benefits cut more than 40 percent or their effective retirement age increased more than 8 years. Whether or not the implementation of a NDC system has a positive impact on GDP depends on the exact reform. Variations in retirement age have the most positive impact. When a NDC pension system is implemented, tax policies to support low-income households can also be performed at a small macroeconomic cost.