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Czech government stumbles over pension reforms

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  • Czech government stumbles over pension reforms

CZECH REPUBLIC - Proposed Czech pension reforms intended to plug a $1.6bn (€1.1bn) state pension deficit have met with opposition even from government loyalists.

One government coalition partner, the Public Affairs party, led by transport minister Vít Bárta, has called for more negotiations on a plan that would allow employees to divert 3% of pension payments into private funds.

The move would be funded by a highly unpopular increase in value-added tax.

Pravo, a local newspaper, described the reforms as "masterpiece among the large-scale thefts known as tunnelling", or the illegal transfer of assets, associated with privatisation in the 1990s.

Not just opposition parties but economists and public demonstrations have rejected the reforms as they currently stand.

A recent poll conducted by NMS Market Research, a local firm, found that fewer than one in five Czech citizens approve the change.

Although the finance ministry has tried to reassure the populace the private fund operations will be regulated and monitored by the central bank, two-thirds of respondents in the same poll expressed mistrust of "risky" private funds.

Jiri Pehe, once a presidential aide to Vaclav Havel and currently director of New York University in Prague, suggested private pension schemes were more likely to collapse than the state scheme.

"When talking about the need to diversify risk, is it not true the vast majority of collapses suffered in the recent economic crisis were of private pension funds, while state systems remain, with few exceptions, stable?" he asked.

"In other words, if there is a really big crisis, which is likely to weaken or collapse first: state or private funds?"

Ondrej Schneider, an economist at the Institute of Economic Studies at Charles University in Prague, acknowledged the government proposal was "not exactly well thought out", but was equally critical of "fully expected, even if completely illogical" opposition from unions, among others.

In his Czech-language blog, he rejected suggestions the current PAYG pension scheme deficit could be plugged by an increase in employee contributions from 34%, already the second highest rate in Europe, because it risked increasing unemployment.

"Reforming the pension system is morally, economically and inter-generationally correct," he said, "but it requires a high degree of confidence in the unshakeable legitimacy of the government. It seems that, especially when it comes to trust in government reform proposals, this is lacking."

He added: "If the Czech government is not able or willing to organise the licensing of pension funds, then we probably really do not have any reform.  Neither should not build highways, operate public transport or treat people in hospitals."

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