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5 February 2018

Czechia: the pension calculation has changed, with further reforms announced

For a very long time, Czechia had no compulsory supplementary pension pillar. Its public pension first-pillar system was supported by a third pillar of a voluntary supplementary personal savings scheme. A second-pillar pension system that was introduced in 2013 never got off the ground. The incoming government is planning an initiative that could bring back some elements of a second-pillar system. But before such proposals were made, the calculation of the pension benefits was first modified. Trade unions and pension associations remain critical about the planned policy.

In recent decades, pension reforms have transferred responsibility for the standard of living in retirement from the state onto the citizens. Like in many other European countries, the population has been rapidly aging. Czechia originally had a 100% first-pillar state pension, complemented by a third-pillar voluntary supplementary personal pension savings scheme. The first pillar is a defined benefit, pay-as-you go system covering employees and the self-employed. This system was unsustainable in the long run and risked working out unfavourably for the younger part of the country’s population. Therefore, a second-pillar system was introduced in 2013, with newly formed pension savings in pension companies. However, this second pillar never really got off the ground and the possibility to enter into it was ended in 2015, without the provision of an adequate alternative. In 2016, the government approved the introduction of a statutory retirement age of 65 by 2030, with the idea that a quarter of expected life be spent in retirement. The legislation foresees a regular revision of the retirement age in five-year intervals, with the aim of adjusting the retirement age to life expectancy.

The incoming government has proposed to change the calculation of the pension indexation. Starting in 2018, pensions will be increased by one half of the growth in real wages (instead of the current one third) and by the inflation rate. The Labour and Social Affairs Ministry stated that prices rose by 2.3% between June 2016 and 2017. To this, one half of the 3.3% growth in real wages is added. Taken together, this results in a growth of pensions by 4% under the revised calculation (compared to 3.4% in the past). Due to this, the average monthly pension will increase by 475 crowns from January 2018 on. If it were to be raised as in the past, the average sum would be 65 crowns lower. The considerable increase in pensions is therefore not only due to the modified indexation, it is also influenced by a growth in prices and salaries in the country.

In its policy statement, the government announced a new pension reform. It wants to separate the pensions account from the state budget and create a solidarity base of equal pensions and a pension component based on individuals' social security payment levels. According to the statement, a public pension insurance company would be formed out of the current Social Security Administration, which would receive funds from mandatory social security payments and pay out the pensions at the same time. The proposals are inspired by several publications by Jaroslav Vostatek, who has recommended the separation of a solidary pillar and an earnings-related pillar. He evaluated the reform processes and concluded that the second pillar had failed so far because its creation was too greatly influenced by private pension fund lobbyists.

Although pension pay is going up, the Council of the Elderly of the Czech Republic argued that the increase is still insufficient; the organisation said that the gap between pensions and wages will keep widening if only one half of the growth in real wages is taken into account. The trade unions, meanwhile, have challenged the separation of the pension account from the state budget. 

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