Czech government signals readiness to deliver on pensions reform

The Czech Republic has so far moved slowly to reform its pay as you go pensions system. But the pressures of a growing imbalance between working people and those who have retired is forcing politicians to grab the nettle with a final reform proposal expected early in 2011.

Jaromír Drábek

According to some calculations this year will be the last when the Czech Republic will have an increasing proportion of people in jobs compared to those who have finished their full-time working life and are on pensions. Some say the slide has already begun.

Whatever the timing, the so-called demographic time bomb is clearly on the horizon and within 20-30 years it is estimated that the Czech Republic will have one of the oldest population profiles in Europe. At the moment there are around two working people to every pensioner. In 40 years the ratio will be one to one.

Thus it is perhaps timely that the much discussed issue of pension reform in the Czech Republic is finally shifting from talk to action. The issue is one of the centre-right coalition government’s top priorities, and last week Minister for Labour and Social Affairs Jaromír Drábek dropped some hints at how believed the process could proceed together with the target for the reformed system to start in January 2012.

On Monday, one of the main lobby representing financial managers, middlemen and advisers made their call for how a future system could be organised so that their members too get a sizeable piece of the multi-billlion crown funds that could soon be created as some of the burden on the state system is relieved.

Photo: Pierre Amerlynck, Stock.XCHNG

But both the minister and lobby group are perhaps getting ahead of themselves. The government has still to come out and give a clear declaration on the pension reform path plotted by the government’s main expert on the area, Vladimír Bezděk.

In June he called for a separate pensions investment fund to be created with obligatory contributions from everyone of working age who is 40 years or under.

Funding for that new fund would amount to 3.0 percentage points of the 28 percent of gross wages which currently flow in the national pay as you earn pension system.

Mr. Bezděk gives this assessment of the current prospects for pension reform in the Czech Republic.

“I believe it should be clear by Spring next year, we are talking about in three to four months from now, whether the government should come up with a proposal on pension reform or not. And of course it goes without saying that if that government proposal will be supported at least partially by the opposition it would make things very much easier.”

Photo: Barbora Kmentová

It’s not just that the Social Democrats are already the majority party in the upper house the Senate, and have the ability to hold things up there. Neighbouring Slovakia, which begin its ambitious pension reform six years ago, is an eloquent example of the perils of this becoming a political football. The rules for contributions were changed constantly there, with a left wing government finally overturning much what the centre-right predecessor had done.

But for Mr. Bezděk time is already running out for the Czech Republic to get its more modest pension reform agreed and up and running.

“Yesterday was already too late because the demographic pressures are already in the Czech economy today, and the demographic shift already started a few years ago. So every year on which the decision on pension reform is postponed is very costly for the Czech economy. The first big troubles can emerge in 20-25 years time from now as far as financing of pension benefits is concerned.”

The TOP 09 Minister of Labour and Social Affairs has already outlined a more ambitious reform than that of the Bezděk committee. He would like to see contributions to a private fund rise to 5.0 percentage points of gross wages after six years. Other parties from the coalition still have to spell out their stand. But it seems already clear that pension reform will be one of the headline issues for 2011.