CZECH REPUBLIC - Pensions is by far the most important issue the Czech Republic has to tackle over the coming years, according to the OECD, as the absence of any policy change on age-related spending will drastically increase public debt.

The Organisation for Economic Cooperation and Development (OECD) has released a review of the country’s financial position stating “long-term fiscal sustainability remains a serious challenge” unless the government tackles healthcare and pensions policy.

In particular, the OECD economic survey noted the Czech Republic’s Ministry of Finance estimated that rapid population ageing would increase age-related spending by 6.4 percentage points between now and 2060, and will push public debt past 60% by 2040 and to more than 250% of GDP by 2060 unless serious changes are made to pensions considered.

“Recent legislation extending the increase in the retirement age will do much to fend of the threat of looming increases in pension spending” said the OECD, “but on current projections pension expenditure is still set to rise from around 7.8% of GDP in 2007 to roughly 11% by 2060.” 

It continued: “Tackling this challenge without imposing large - and possibly unsustainable - increases in social security contributions or other taxes is likely to require a combination of both further parametric adjustments to the system and structural changes.”

The Czech finance ministry has predicted that projected spending will fall by 1% of GDP by 2060 following a recent move in 2008 to increase the retirement age by two years. However, the projected GDP of age-related spending in the Czech Republic will be 23.4% by 2060, according to data gathered by the European Commission and used in this report.

The authors recommend one starting point might be to phase out the differentiation between women’s retirement ages and perhaps introduce partial indexation to life expectancy.

It claimed the earlier government’s aim to create a voluntary but fully-funded, defined contribution second pillar pensions regime might be one way of helping the country’s pension problems, even if political consensus has “stalled”, although officials noted any removal of assets from the first pillar system could undermine financial sustainability too.

Instead, the OECD has proposed the Czech Republic introduce mandatory or “soft compulsion” to pensions by requiring individuals to opt out rather than opt in.

“While the recent financial crisis will probably make it harder to win public support for greater reliance on funded DC pension schemes than would have been the case when financial markets were booming, the fact remains that the crisis has reduced the rates of return on contributions to the PAYG pillar as well, even if the decline has been less visible,” said the OECD.

“The case for diversified sources of retirement income as the best way to deliver income security in old age thus remains strong..

It noted that a “DC carve-out” of pension assets would lead to a “transitional deficit” as revenue into the first pillar pensions regime would fall straight away, so how much impact it would have at retirement would have to be carefully determined at the carve-out stage.

Either way, said the OECD, a simple carve-out of assets would need to be topped up with further reforms to ensure members have sufficient income at retirement.

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