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OECD says Czechs need second pillar

CZECH REPUBLIC – The OECD has suggested that the Czech Republic should establish a second pillar pension system to deal with its pension woes on a long-term basis.

The pay-as-you-go pension system of the Czech Republic is its largest mandatory spending item, presently generating deficits totalling 1% of GDP. This is expected to double in the coming years, rising further by 2030.

“The Czech Republic has some margin of flexibility in ensuing pension reform insofar as privatisation receipts in the next few years would provide a financial buffer. But the essential point is that such margin be used to underpin a genuine reform, and not to finance temporarily a system that is unsustainable in the long run,” says the OECD.

Suggests the OECD: “The first step towards a scheduled pension reform would be a readjustment of key PAYG parameters.” A switch to inflation indexing may return the system to current balance by 2006 and result in slowly rising surpluses in subsequent years, says the report, but on a long-term basis would not be socially sustainable. One way of providing additional retirement income would be to establish a second pillar system.

A second pillar system has been rejected by the Czech Republic up to now, yet it boasts one of the earliest private systems, with around 40% of the workforce contributing to a private scheme.

The argument that the third pillar system and the state system together are sufficient has been long-standing, but a second-pillar system may have to be considered by the government, especially if they want to ensure younger workers are saving for retirement – at the moment the average age of Czech pension fund members is relatively old, at 45 years.

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