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IPE special report May 2018

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Czechs must brace for “punishing” pension reform

CZECH REPUBLIC – A rapidly ageing population will result in “punishingly high” contribution and tax rates if the Czech Republic does not make further changes to its pension system, says the International Monetary Fund.

The IMF said that the demands of a rapidly ageing population “will, without further changes to the pension system, result in punishingly high contribution and tax rates”.

It said that current Czech reform proposals need to go further in addressing population ageing.

It advised “more aggressive efforts” in pension reform. It called for a further increase to the statutory retirement age and an extension to the minimum contribution period for full-pension eligibility. And it wants benefits to be indexed to consumer price inflation.

Last month the Organisation for Economic Cooperation and Development 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 one percent of gross domestic product. 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.

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