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IMF warns against first pillar opt-out

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  • IMF warns against first pillar opt-out

CZECH REPUBLIC - Allowing people to opt out of the pay-as-you-go state pension pillar might end in consumption decline in the long run, the International Monetary Fund (IMF) warned.

A report from the international body argues plans to introduce a regime generating partial or fully-voluntary retirement provision will fail because of people's "myopia", as currently proposed by the Czech Republic.

"Given the option, consumers who are liquidity constrained and those that are impatient do not fully save the surplus that accrues from the reduction in social security taxes."

IMF researchers added this will result in "consumption and output increasing in the short-run, at the expense of a large long-run decline" because of lower or non-existent traditional social security benefit payments.

Moreover, the tax system would have to be changed if an opt-out of the first pillar is to work, the IMF noted.

"To offset the consumer myopia, a revenue-neutral tax incentive could be considered that increases voluntary incentives to save." 

IMF staff have proposed a reduction in corporate income tax would encourage capital accumulation.

However, these plans are only be considered for a third phase of a pension reform which currently only goes as far as a political consensus on raising the retirement age to 65 from the current 63 years.

According to the IMF, this reform "leaves out the important question of reform to the pension system" itself.

The government also wants to increase the period for qualifying for a pension from 25 to 35 years of work, as well as creating more incentives for late retirement. (See earlier IPE story: Czech Republic "needs early reforms" - IMF)

Further reform steps are apparently being planned over the coming years, including a strengthening of trust in the second pillar by separating clients' assets from those of the fund sponsors.

That said, Czech officials at the ministry of labour and social affairs have told IPE there are no plans to introduce occupational pension schemes.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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