CZECH REPUBLIC - The International Monetary Fund (IMF) has warned the Czech Republic it needs to implement early reforms to its state pension system if it wants to "put public finances on a sustainable path".

The IMF's latest country report entitled Czech Republic: Selected Issues focused on the country's attempts to reduce its budget deficit from almost 4% in 2007 to below the EU-threshold of 3% of GDP in 2008.

In particular, it looked at the recent package of tax and welfare reforms which include a flat rate tax of 15% and a cap on social security contributions of four times the average wage - approximately CZK1m (€38,441).

But the organisation claimed spending reforms, in particular for health and pensions, had "not been implemented as envisaged" and warned going forward "it is imperative to flesh out and implement substantial spending reducing reform in the pension system".

The IMF pointed out the recent package of reforms only included proposals to further increase the retirement age to 65 by 2018 and to extend the qualifying period from 25 to 35 years of work, which, although it would "relieve" fiscal pressures, would not stop deficits increasing over the long-term. 

Similarly, although the Czech government is discussing a more comprehensive overhaul of the pension system, to take place within the next couple of years, the IMF also warned longerterm spending pressures stemming from pensions, "call for early reform efforts to put public finances on a sustainable path". 

Several proposals being debated for the second phase of reform include pre-funding measures to create a separate account for saving future pension surpluses, and a transition to fully-funded private pension schemes where workers can divert part of their social security contributions away from the existing pay-as-you-go public pension scheme.

However, the IMF warned the choice of the pension reform measures would depend on "additional considerations" such as whether the pre-funding of pension reserves would promote generational equity in sharing the fiscal burden of ageing.

In addition, directors of the IMF executive board reiterated the  "importance of early and comprehensive pension and healthcare reforms" and warned alongside the existing proposals "complementary" reforms to "promote reliance on private pensions will also be needed".

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