The Impact of Projected Demographic Developments on Funded Pension Provision in Austria

Abstract

The following study analyzes the impact of demographic developments in Austria on funded pension provision in Austria. It does so by integrating demographic developments in to a standard growth model, linking the results to the accumulation and annuitisation of funded pensions. Furthermore, the simulations introduce the possibility of the international diversification of investments and consumption as well as the integration of real capital markets. The simple structure of the model allows us to conduct a number of sensitivity analyses. Furthermore, it helps to identify the the underlying interactions at work in obtaining the overall results. The key results of this study are the following: (1) Households' net supply of savings and the demand for capital by the corporate sector (net investment) both need to be integrated into the empirical and theoretical analysis of the impact of demographic developments on financial markets. Considering the relative supply and demand for financial assets within the household sector (as is done in the asset meltdown literature) is not the adequate conceptual framework. (2) Funded pension provision is exposed to two demographic risks: decreasing birth rates and increasing longevity. On the one hand, lower expected growth rates of the input labour are expected to exert downward pressure on long-term real interest rates and future pension income. Increasing longevity further reduces future pension income. (3) On the other hand, decreasing future net savings relative to net investment partly exert upward pressure on the long-term real interest rates. The net impact is evaluated based on a simulation exercise. (4) In public discourse, the superiority of funded pension provision is argued on the basis of demographic change, which is supposed to make public pension provision unsustainable. The model and the simulations in this paper highlight the impact of demographic change on funded pensions and its dynamics as well as quantify the order of magnitude of this impact. The negative impact of demographic change on funded pension provision is non-negligible.

Keywords: Demography, Financial Markets, Pension Funds, Pensions

JEL Classification: E20, G23, J10