Proposed Czech pension reforms divide pundits

The Czech government has agreed the main lines of one of its most ambitious reforms, that of the creaking pension system. But the formula advanced seems to have won few friends. Trade union leaders say it goes too far and some leading economists say it does not go far enough.

Petr Nečas, photo: CTK
Prime Minister Petr Nečas last week congratulated his fellow ministers after they thrashed out the main lines of pension reform. As the prime minister remarked, this is one of the coalition government’s hallmark reforms. Success will tick a box in its favour and failure put a big black mark against it.

The prime minister said agreement had been found on 90-95 percent of the reform. The most significant step is the creation of a private pillar of pension fund provision aimed at relieving some of the pressure from the state system. Young people will be able to opt into that system channeling three percentage points of their social insurance payments into it as long as they top it up with another two percentage points of their own money. Older people can also opt into private funds but for many it is reckoned that staying with the state system will be more tempting.

To fill an expected hole in state pension provision due to the reform, Value Added Tax is be raised to a uniform 20 percent on all but a few essential items leading to an expected surge in inflation.

But even before the final elements of the reform are in place, ranks have divided over its merits.

Josef Středula
Josef Středula is the leader of one of the country’s biggest unions, the metal bashers’ KOVO. He says that many of the current problems in the state pension system have been caused by the government’s failure to make employers, the rich and self employed shoulder their fair share of the burden.

“We think that the Czech solidarity of the current pension system still functions. Czech politicians, that is liberals, have altered this system with the result that it is losing a lot of money because of the changes to the percentage contributions paid in by employers. That was a tragic step taken by the government with the result that the state pension fund had a result of minus 30 billion crowns in 2010. We fully agree with changes, but they should primarily affect rich people.”

He says the current state system should be strengthened and not weakened by encouraging some people to opt out of it. If people want to take out private pensions then they still can, but not at the expense of those left in the state system.

The main opposition, the Social Democrats, share many of those misgivings and have not backed the government reforms, casting a shadow over their permanency.

On the other side of the fence, some economists have branded the changes as too timid, pointing out that the size of contributions to the spun off private funds do not really rebalance the whole system. Worse, the state system could be left covering the weakest members of society and drawing on their relatively weaker contributions.

One of the biggest uncertainties over the reform is how many Czechs will take up the incentive to shift some of their pension cover into private funds. The Minister of Labour and Social Services estimates 50-60 percent will do so but the most accurate assessment seems to be that nobody really knows.