Reform of Severance Pay Law in Austria

In 2002, Austria has reformed its severance pay legislation. In the new system (Abfertigung Neu) individual savings accounts are managed by so-called employee provision funds (“Mitarbeitervorsorgekassen”). The system is funded by employers via a monthly untaxed payment of 1.53 % of gross wages. Accumulated entitlements rest in the employee’s account until retirement, unless the work contract has been terminated by the employer, which makes cash payments possible. Upon retirement, employees can claim a cash payment or convert their entitlements into an annuity. Aims of the reform are increased labour market flexibility, an extension of eligibility, and an improvement of the capital market. In general the reform eliminates obstacles for worker mobility, and for the firms it converts the unpredictable dismissal costs (at the time of hiring) into predictable costs. Therefore, the reform strengthens the “flexicurity” features of the Austrian labour market. Eligibility for severance pay is extended to almost all employees. The reallocation of funds via the capital market strengthens the funded pillar of the pension system. However, the possibility to claim cash payments after job termination and the relatively low contribution rate imply that the new system does not generate a sufficient second pillar retirement income. One should note, that the available evidence indicates that disbursement is preferred to acquiring pension claims by a considerable number of workers.