Planning ahead: saving for retirement
We all need to make sufficient financial provisions for our future to ensure our financial well-being when we retire. Starting to do so early on is even more important in view of demographic trends, which indicate an ageing society and an increasing number of people in retirement.
Making provisions at an early stage is also essential if you plan to maintain your current standard of living in retirement and want to live a financially independent and carefree life.
Saving for retirement: Why do I need to think about it now?
By clicking the "Enable video" button, you activate the YouTube video. This may cause personal data to be transmitted to Google. For more information, see Privacy Policy.
The Austrian pension system
The Austrian pension system is based on three pillars: statutory pensions, occupational pensions and private pensions. The statutory pension system is a mandatory pay-as-you go scheme. It is financed through monthly contributions that are deducted from the salaries and wages of Austria’s working population. These funds are then used to finance the pension benefits paid to those already retired. By paying monthly contributions (calculated based on your monthly gross income), you will eventually also be entitled to pension benefits.
Under voluntary occupational pension schemes, employers pay monthly contributions into a pension fund. The money paid into the fund is invested and paid out to employees as supplementary pension benefits later on.
In addition to statutory and occupational pension schemes, you can also set up private pension plans in order to top up your income in retirement.
The following table outlines the main components of the pension system in Austria:
Statutory pensions
First pillar: Statutory pension benefits form the basis of your pension. Enrollment in this pension scheme is required by law. Part of your gross income from work will be deducted to fund statutory pension benefits. The higher your gross income and the longer you work, the higher your statutory pension benefits will be later on.
Occupational pensions
Second pillar: Under the occupational pension scheme, the money paid in is invested and paid out as supplementary pension benefits when you retire. Employers are not required to offer these kinds of pension top-up benefits, but can do so voluntarily.
Private pensions
Third pillar: Private pension plans allow you to make independent and voluntary provisions for your future, providing for additional financial resources on top of your statutory pension benefits.
The Austrian pension system does not only consist of old-age pension schemes but also includes other types of pension schemes, such as invalidity pensions for people who need to retire early due to severe health reasons. People whose spouse or registered partner has passed away receive a widow’s or widower’s pension if certain conditions are met. Children whose mother or father has died are entitled to an orphan’s pension.
Statutory pensions
The statutory pension scheme plays a very important role in the Austrian pension system. Based on a pay-as-you-go mechanism, it relies on the principle of solidarity between those in employment and those in retirement. In fact, those who have already retired receive the amounts people in active employment are paying into the statutory pension system. This is also referred to as the “contract between generations.” The amount paid into the system corresponds to 22.80% of people’s regular gross earnings. Of this amount, employees contribute 10.25% and employers 12.55% of the gross pay.
Paying-as-you-go financing has the benefit of involving hardly any administrative costs. Still, the statutory pension system in Austria is coming under increasing pressure, as there are more and more retired people compared to fewer employed people. The baby boomers, born in the 1950s and 1960s, are now retiring and will be followed by far fewer workers to finance their retirement. In addition, the actual retirement age in Austria has risen only slightly in recent years, while general life expectancy has increased significantly. Forecasts even suggest that in 2057, there will be as few as 1.9 working people for every retired person. Assuming that pension benefits should amount to up to 80% of an individual’s average lifetime earnings, around four workers would be needed to finance the pension benefits of one retiree. Only then would the statutory pension system be sustainable without government support.
The share of pension benefits that cannot be financed with workers’ contributions is funded by government subsidies out of the household budget. Government spending on pension benefits (subsidies to statutory pension insurance and civil servants’ pension insurance) account for more than half of social expenditure in Austria. Employees’ pension benefits are calculated based on their level of gross income and length of insurance contributions (i.e. number of contribution months) over their entire working life.
Pension benefits and pension account
To receive statutory old-age pension benefits, individuals must have reached the statutory retirement age and must have accumulated sufficient insurance periods (for further information on the retirement age, see the website of the Federal Ministry of Social Affairs, Health, Care and Consumer Protection). From 2024 onward, the retirement age for women will be gradually raised from 60 to 65 years to match that of men in 2033. Pension insurance is mandatory in Austria and organized by the social insurance institutions. As soon as an individual’s pay exceeds the so-called marginal earnings threshold, they are required to pay contributions to pension insurance. The Austrian pension insurance institution (Pensionsversicherungsanstalt – PVA) is the largest domestic insurance provider. There is also the insurance institution of public sector employees, rail and mine workers (Versicherungsanstalt öffentlich Bediensteter, Eisenbahnen und Bergbau – BVAEB) and the insurance fund of the self-employed (Sozialversicherung der Selbstständigen – SVS). The amount of the statutory pension is based on the contribution periods (insurance months) and the contribution base (for employees, for instance, the contribution base is determined by their monthly gross salary up until the maximum contribution base). In addition to periods of gainful employment, periods of partial compulsory insurance also count towards the contribution base. These are e.g. periods spent caring for children, time spent on sick leave or periods during which individuals received unemployment benefits or unemployment assistance. Finally, individuals also have the option of acquiring additional contribution periods through voluntary insurance (e.g. for periods during which they only worked part-time). Once you pay contributions to pension insurance, a pension account will be set up for you with the federation of Austrian social insurance institutions. Your pension account will systematically record all your pension contributions as partial credits. The total credit posted in your pension account divided by 14 corresponds to your current gross monthly pension benefits.
Tip
- Personal pension account: Everyone who has a personal pension account is authorized to retrieve information on the balance of their personal pension account.
The amount of the statutory pension you receive is influenced by several factors:
Income
The training or profession you choose will have a certain impact on your old-age pension. High-income professions come with higher pension insurance contributions and thus higher pensions later on. On average, women earn less than men. In statistical terms, women are also still more likely to work in lower-paid jobs. Therefore, pension payments tend to be lower for women compared to those for men.
Domestic work and caring for children or relatives
According to Statistics Austria, women take on more unpaid work in the household than men. This includes duties such as looking after children or caring for relatives, which are referred to as care work. While these periods are generally recorded as contribution periods, the amount of contributions paid during such periods is lower than during periods of full-time employment. This contributions gap widens even further if women decide to work part-time following periods of unpaid care work. Note that anyone who spends a considerable amount of their work capacity caring for a close relative can take out pension insurance on preferential terms.
Health and unemployment
Individuals who work until they reach the statutory retirement age receive higher pensions. In the event of illness or long-term unemployment, however, this might not be an option and will result in a reduction of the contribution base and thus lower pension benefits.
Occupational pensions
Occupational pensions are the second pillar of the Austrian pension system. These are voluntary benefits provided by your employer; not all companies in Austria provide these types of benefits. Under this scheme, your employer commits to pay monthly contributions to a pension fund (Pensionskasse) for your old-age provision. Depending on the agreement made, you may also pay in contributions yourself as part of your private pension plans. The contributions paid in will then be invested by the pension fund. Occupational pensions can be attributed to funded pension systems (as opposed to pay-as-you-go systems). The funds to be invested are bundled into so-called investment and risk-sharing groups. Each of them contain the contributions and entitlements of a large number of employees. These will be invested collectively in the capital market. This allows for a balancing of risks among the prospective beneficiaries, i.e. those eligible for occupational pension benefits.
Private pensions
Private old-age provision includes all measures you take in order to receive additional income in retirement or to ensure your financial security in old age. There is a large range of plans to choose from, the most important ones being:
Voluntary top-up contributions
Individuals may pay in top-up contributions on a voluntary basis, thus supplementing their future pension entitlements accrued under the statutory pension scheme. Such contributions may only be made on top of pension insurance contributions that individuals are required to pay as part of their compulsory insurance, continued insurance or self-insurance. Individuals can choose whether they want to pay top-up contributions on a regular basis or at specific times and in specific amounts.
Life insurance and private pension insurance
When providing for old age, life insurance and private pension insurance may play a particularly important role. There are several types of life insurance policies available, including policies that account for sustainability aspects in their design.
- Pure life insurance pays out either a lump sum or regular lifelong payments on the insured person’s death, giving their dependents financial support after the insured person has gone. By taking out pure life insurance, individuals can also make sure that specific payments, such as loan payments on a common property, will be covered if they happen to pass away before repaying their loan.
- Term life insurance works like a long-term savings plan, i.e. policyholders pay premiums over a long period of time. At the end of the policy term, policyholders can usually choose between a lump-sum payout or lifelong monthly payments.
- Private pension insurance works in a similar fashion to term life insurance, with the insured person regularly paying premiums to an insurance company over an extended period of time. In return, the insurance company commits to make regular payments to the insured person from a certain point in time onward (usually when they retire).
- Incapacity for work and disability insurance results in predefined monthly payments if the insured person can no longer work (due to e.g. an illness or accident)
Savings products and securities
When saving for retirement, you can choose among a wide array of investment products, such as savings books, retirement savings accounts, shares, bonds, funds or exchange-traded funds (ETFs) (for more information, see Saving and investing). You should bear in mind, however, that many savings products only offer limited protection against inflation. Moreover, investing in securities usually comes with administrative costs (especially in the case of shares or funds, but also for the custody account you need to set up).
Real estate
Investing in your own home is another way to make provisions for old age. If you manage to finance your home during your working life and pay off your mortgage before you retire, your financial burden in retirement will be considerably lower.
Women and pensions
It is primarily women who are affected by poverty in old age. There are various reasons for this: Statistically speaking, women still earn less than men today (gender pay gap). In addition, women in our society continue to take on the majority of unpaid work, also known as care work. As a result, women, on average, accumulate significantly fewer funds in their pension accounts than men over the course of their lives.
When they retire, many women are then faced with income losses and low pension benefits – often times a result of many years of part-time work, maternity leaves and generally lower incomes. For instance, if a woman works 20 hours a week instead of 40 hours following a parental leave, her pension entitlements will be halved during this period of part-time work. Moreover, if a partnership ends or a partner passes away before retirement, women may often face financial difficulties as a result, which may turn into an existential threat. This is why it is important for women to proactively address the issue of pension amounts in their partnership and to explore, together with their partner, possible avenues to guard against poverty in old age. In this context, it is also a good idea to consider pension splitting or organized childcare services. In a partnership, it takes both women and men to work toward making sustainable provisions for old age.
Tip
- Pension splitting: Pension splitting allows the parent who works (more hours) to transfer up to 50% of their pension credits to the parent who e.g. works part-time and takes over childcare following their parental leave. → https://www.pv.at/cdscontent/?contentid=10007.779168
A brief recap
What options are there in Austria to provide for retirement?
In Austria, old-age provision is based on three pillars: statutory pensions, occupational pensions and private pensions. The statutory pension system is a pay-as-you go scheme, which means that the social security contributions deducted from the salaries and wages of Austria’s working population are used to directly finance the pensions benefits of those in retirement. Under the voluntary occupational pension scheme, your employer commits to pay, monthly contributions for your old-age provision to a pension fund. The contributions that are paid in will be invested by the pension fund and will eventually be paid out as supplementary pension benefits. Private pension provisions include all measures that you take yourself in addition to statutory and occupational pension plans in order to have a secure financial future.
How does the statutory pension scheme (“contract between generations”) work?
In Austria, statutory pension provisions are organized as a pay-as-you-go scheme, also referred to as the “contract between generations.” In other words, the contributions paid into the statutory pension scheme by Austria’s working population directly finance the pension benefits paid out to Austria’s older generations. However, since this system cannot be entirely financed by contribution payments, it is also subsidized by the federal government.
What factors determine the amount of statutory pension benefits?
The amount of statutory pension benefits depends on different factors, including the number of contribution months, the amount of employees’ gross pay, childcare periods, periods of sick leave and periods during which individuals received unemployment benefits or unemployment assistance.
What is a pension account?
A pension account is set up for all individuals who pay contributions to pension insurance. It systematically records all pension contributions as partial credits. The total credit posted in an individual’s pension account divided by 14 corresponds to the amount of their monthly statutory pension.
How does the occupational pension scheme work?
Employers in Austria can choose to pay voluntary, monthly contributions to a pension fund for their staff. These funds are managed by the pension fund and paid out later on as supplementary pension benefits.
Why is it important to make private provisions?
To supplement statutory pension entitlements, individuals should try to also set up private pension plans if they wish to maintain their standard of living in retirement.
What options are there in Austria to make private provisions?
In Austria, there are several options for providing yourself for old age. These include voluntary top-up contributions, life insurance, private pension insurance, savings products, securities or investments in real estate. All of these options can serve as an additional source of income and can provide greater financial security in your later life.
