The Austrian system of severance pay is the subject of two reform proposals currently before Parliament. Their effects on the development of labour costs largely depend on the level of severance pay under the current legislation and the provisions already built up on the balance sheets of firms. In the absence of official records, estimates have to be used for both figures. Based on the distribution of wages over the duration of employment, WIFO estimates current severance payments at 2.3 percent of wages and salaries, which corresponded to a total of ATS 19.2 billion in 1997. Provisions for severance payments on the balance sheets of firms are estimated at ATS 75,2 billion, the stock of assets covering such provisions being ATS 37,6 billion (1997). These numbers do not include voluntary severance payments beyond the statutory obligation. On the basis of these initial values, the reform proposal introduced by the Social Democratic Party requires a transition period of 15 years to take full effect, whereas the proposal submitted by the People's Party assumes a maximum of 40 years (excluding voluntary change-over to the new system). A fixed contribution rate of 2.5 percent of wages and salaries, as provided for in the ÖVP proposal, will result in a reduction of long-term labour costs. In the short to medium term, however, transition costs will arise. The SPÖ proposal will increase labour costs due to severance pay drastically in the short term and slightly in the long term. Compared with the current situation, the change-over to a contribution-based system encompassing all employees will not be neutral with respect to different sectors of the economy. Labour costs in seasonal sectors or sectors with a high mobility of labour will increase significantly. The budgetary effects for public households will be positive in the long run, since interest on capital widens the base for taxation, but negative in the short term. Due to deferred taxation, tax revenues under the new system will be lower in the initial years after its introduction. The current system of severance pay imposes a heavy burden on the liquidity management of firms. Payments are made in the form of lump sums at the termination of an employment contract. The change to a contribution-based system will smooth the demand for liquidity and therefore facilitate financial planning. This will be of advantage, above all, for highly leveraged firms and firms in financial trouble. Consequently, the number of insolvencies ought to decline over time. A transition phase with high additional costs due to the co-existence of the old and new systems will be a considerable challenge to liquidity management. Small retail and manufacturing businesses are likely to encounter difficulties under such a scenario.