The Economic Implications of a Balanced Three-pillar Model for Old-age Provision

In addition to smoothing consumption between working life and retirement, every pension system pursues insurance and redistributive objectives. A balanced combination of pay-as-you-go and funded schemes makes it possible to achieve this set of objectives with minimal side effects on goods, labour and capital markets. By European standards, Austria exhibits high income replacement rates within a pension system predominantly financed through the pay-as-you-go system. This results in smaller bond and equity markets, a higher proportion of small and medium-sized enterprises, greater influence of core shareholders on corporate governance, a higher proportion of property in the net assets of private households, and a smaller venture capital market. Funding pension entitlements through capital accumulation makes pension benefits less dependent on domestic economic strength and broadens the economic base for the pension system. Portfolio analyses show that the optimal share of funded schemes is positive in most countries; in some calculations, this share reaches 100 percent of the pension portfolio.