Pension reform draft is on the table but is it a real reform?

11-12-2003

The government has presented a pension reform proposal as the first government since 1989 to have the courage to make any real steps towards what no-one doubts is urgently needed. However, while Trade Unions expres worries about the pensions of low-income groups, analysts say the proposal seems like "too little, too late".

Czech Prime Minister Vladimir Spidla has presented the government's idea of pension system reform to be materialised by the end of its term in June 2006. The current pay-as-you-go system where pensioners are paid from contributions paid by the working population, is running into ever deeper deficits because people live longer and there are fewer young people to put in the cash.

There have been discussions over possible changes for years but none of the previous governments had the courage to adopt any substantial reforms but extending the retirement age. The current government led by the Social Democratic Party, favours a pay-as-you-go system based on so-called notional defined contributions, which would link pensions closer to what people pay throughout their working life. On top of that, people are able to get a voluntary pension insurance policy.

The Labour and Social Affairs Ministry will submit a draft material on the pension reform to the cabinet by the end of this month. If approved, the new system should be launched between 2007-2010.

Meanwhile, the Trade Unions disagree with the Labour and Social Affairs Ministry's proposal to reform the pension system by introducing so-called notional defined contributions or fictitious individual accounts. The Trade Unions are worried about the impact on low-income groups and demand that models be made first.

The Ministry of Labour and Social Affairs believes that the new system would make it possible to preserve the desirable proportion between the average wage and pensions. However, the ministry was unable to answer the Trade Union's main question: how much will people pay and how much will they eventually get?

Economic analysts have expressed scepticism about the latest pension reform proposal, saying it will not resolve the main problems. The proposed system is a mere modification of the current pay-as-you-go system, which in itself does not tackle the main issue - a persistent lack of money and the expected considerable increase in the deficits of this system.

Some have warned that in order to keep the new system in the black, either pensions will have to decrease or stay the same but the state will have to provide the money from other budget resources. That is why the proposed changes are seen as partial steps on a way to more fundamental reforms.

Many experts agree that the best possible solution would be a three-layer system, with an entry-level pension financed from the pay-as-you-go system, mandatory savings in capital funds which would make pension proportional to an individual's income, and an extra voluntary pension insurance. A simpler idea yet also effective would be replacing the pay-as-you-go system with real, individual accounts. The money would be further invested on financial markets.

However, such a change would require a large amount of money to start the system, because many working people would not have time to save enough money to guarantee a decent pension. Critics say the country squandered its chance to make such fundamental changes at the beginning of the 1990's when the state received hundreds of billions of crowns from the privatisation of state assets which could have been used for pension reforms.

11-12-2003