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Pension reforms in Czechia: background summary

Numerous changes introduced into the pension system since 2000 have been driven by the effort to increase the financial sustainability of the pension system. The establishment of the second pillar has failed. Thus, the most important changes consist of increasing the pension age and adjusting the required contributory period.

Characteristics of the pension system

  • The pension system consists at present of two pillars: a public pension scheme (1st pillar) and a voluntary private pension scheme (3rd pillar). The system covers both employees and self-employed.
  • The public pension scheme is compulsory. The contributions to the system are paid on a pay-as-you-go basis (MISSOC 2015).
  • The relevant social insurance contribution amounts to 28% of the declared monthly earnings. In the case of employees 21.5% are paid by the employer (ISSA; European Union 2015).
  • The pension age, in 2016, is 63 years for men and 62 years for women without children. With an increasing number of children, the pensionable age of women decreases. However, the pensionable age has been gradually increasing for both genders in a way that it should be levelled for both men and women and should reach 66 years and 8 months for both sexes regardless the number of children for the cohort born in 1975. For every subsequent birth cohort the pensionable age should increase by two months without any upper limit (cf. ČSSZ 2016; OECD 2015; European Commission).
  • A person is eligible for an old-age pension if s/he has reached the pensionable age and has paid pension insurance contributions for the required number of years. The required number of years is 32 at present but it is gradually increasing to reach 35 years for persons who will reach retirement age after 2018 (European Commission; ČSSZ 2016).
  • The old-age pension includes a basic (flat-rate) and a percentage (earnings-related) amount. The basic amount corresponds to 9% of the average wage, i.e. in 2016 it reaches CZK 2440 monthly (see ČSSZ 2016). The percentage amount depends on the number of insured years (1.5% of the calculation base for every year) and the average earnings of the pensioner received from 1986 on. It should gradually cover the lifetime average. The average earnings are reduced to the calculation basis by the application of income thresholds, which are set at 44% and 400% of the average wage (OECD 2015; European Commission). The minimum percentage amount is CZK 770 (ČSSZ 2016), the maximum is not defined (MISSOC 2015). The benefits are adjusted every year according to the increase in consumer prices and real wages (ISSA).
  • The voluntary private pension scheme consists of supplementary pension savings in private pension funds. It is available for all individuals aged 18 and over. When the individual monthly contribution reaches a certain amount, the state provides the insured person with a state subsidy. The employer might pay the contributions (or a part) as a form of employee benefit. An insured person can draw pension allowances from the scheme, if the insured contributed at least 5 years to the system and at most 5 years before the pensionable age (ISSA).
  • There is no occupational pension scheme; the existing schemes are universal. Nor does the compulsory scheme provide for a special treatment of arduous jobs . However, the possibility to draw pensions from the voluntary private pension scheme up to 5 years before the pensionable age has been introduced in particular with respect to the persons in arduous jobs (European Union 2015).

Recent pension reforms

Over the past 20 years the governments have been attempting to increase the long-term sustainability of the pension system, challenged by fast population ageing. Hence, a number of parametric changes to the system have been gradually introduced (Holub and Šlapák 2015; European Union 2015):

  • Stricter criteria for early retirement were applied several times and attempts were made to make the conditions for deferred pensions more attractive.
  • The pensionable age has been gradually increased over the last 20 years from 60 years for men and 53-57 years for women (according to the number of children) and the differences between men and women and women with various numbers of children are gradually being levelled out.
  • Insurance contributions have been increased from 26% to 28% of the assessment base since 2004.
  • Since 2008 the extent of non-contributory periods, which are counted towards the time of insurance, has been reduced. At the same time, the minimum contributory period has been extended since 2010 from 25 to 35 years (the target length should be reached in 2019). The possible length of the early retirement has been prolonged from 3 to 5 years due to the increasing pensionable age.
  • In 2011 a reform package, called a ‘small pension reform’ was introduced. Among other things it included an adjustment of income thresholds to reduce the level of solidarity of the system and an increase in penalisation of early retirement from 2012. The pensionable age has been further increased to 67 years for those who are born in 1977 and subsequently it should be further raised by two months for every birth cohort with no defined ceiling.
  • In 2013 the second pillar of the pension scheme, a private fully funded pension scheme, was introduced as part of the ‘great pension reform’. Nevertheless, it attracted less than 2% of the labour force, which was partly due to the insufficient promotion of this pillar by the government but also due to the declared intention of the opposition to cancel the pillar if it were to win the next elections, and a low trust in financial markets in aftermath of the crisis. One of the reasons of the opposition to disagree with the introduction of the second pillar was the potentially increasing public deficit, because the contributions to the private second pillar were diverted from the public first pillar (cf. Drahokoupil and Domonkos 2013). Therefore, the pillar was closed at the end of 2015, after the then Social-Democrat opposition won the elections in 2013.
  • After abolishing the second pillar the government focused on how to motivate more workers to accept the third pillar and to increase the level of contributions to this pillar as at the moment the average contributions are still quite low. Furthermore, the Social-Democrat government plans to limit the pensionable age to 65. Thereafter, the pensionable age should be continually redefined in regular intervals according to the changes in life expectancy.