CZECH REPUBLIC - The Czech pension account of the state budget was in a deficit of 1.8 billion crowns (56.6 million euros) in mid-June, although the Finance Ministry had predicted a surplus of three billion crowns.

According to data from the Finance Ministry, the government has collected 113.7 billion crowns in pension insurance contributions, while it spent 115.5 billion crowns on the payment of pensions since the start of this year.

The government's budget plans 230 billion crowns contributions and a six billion-crown surplus on the pension account for the full year. If the government reverses the current trend and fulfils its promise, it would be the first surplus after several years of deficits. Pension account deficits ranged from 18.9 billion crowns to 19.6 billion crowns between 1999 and 2003.

The pension account is in a deficit, although the system of payments was changed. As of January 2004, social insurance premiums paid by employees and companies have been raised to 28% from the previous 26% of salaries. At the same time, the contribution to the government's employment policy dropped to 1.6 % from 3.6 % of salaries.

The government spent some 229 billion crowns on the payment of pensions last year, an increase of 50 billion crowns over the last five years. The expenditures on pensions are expected to increase further due to negative demographic trends.

Analysts warn that the pension account deficit will skyrocket to 400 billion crowns in 2040 without a change in the pension system.

Analysts say it will be hard to find funds needed for a kick-off of the reform at the time when proceeds from new state bonds issues are used mainly to finance state budget deficits and the majority of state property has been privatized.

At the end of last year, the government proposed reforming the current pension system by introducing a so-called Notional Defined Contribution (NDC) system. Under this model, individual national accounts would allow all employees to see how much they have contributed to their pensions, and how high their pensions will be. "This change is not sufficient. A deeper reform is needed," says David Marek of Patria Finance investment company.

Earlier this month, the Czech Finance Ministry said that pension reform would start only in 2006 because it was hard to achieve an agreement across all political parties. The current government crisis could even prolong this process. "The pension reform should have been launched already ten years ago," says Marek.

"Only mandatory savings in private pension funds would solve the pension system crisis," says Petr Benes of CSOB bank. Other possible solutions include a further increase of social insurance premiums to 34 % of wages, inflow of 1.5 million immigrants at working age, increase of birth rate from the current 90,000 to 150,000 a year, or a dramatic increase of the country's debt.