Budget Council: Pension imbalances are a significant public finance problem

The imbalance of the pension system is the biggest problem of the Czech public finances. On Thursday, the National Budget Council (NBC) said this in its regular quarterly opinion on public finances.

It said it would be necessary to stabilize the system to change the form of pension indexation, gradually raise the retirement age, and change the parameters of pension assessment.

At the same time, the council said the third pillar of pensions, in which people save privately, will need to be adjusted, as it is mainly dysfunctional in its current form.

The pension deficit will reach CZK 70 billion this year with reduced extraordinary pension indexation. The NBC said that if the president vetoes the cut in indexation and the House does not override the veto, the deficit would be CZK 90 billion.

“This imbalance arises despite a relatively favorable demographic structure and is predominantly caused by the setting of the valorization mechanism, which, in conditions of high inflation and falling real wages, leads to significant deficits in the pension account and motivates people of pre-retirement age to retire early or apply for early pensions,” the council said in its opinion.

According to the NBC, extraordinary and regular pension indexations need to be adjusted. According to the council, the current one-off change to the June indexation is insufficient, and a systemic adjustment is needed.

Given the upcoming retirement of the strong baby boomers, the NBC believes that a more extensive adjustment of the pension system will also be necessary.

“However, this cannot be done without adopting unpopular changes, including, in particular, a gradual increase in the retirement age above 65 and adjustments to the parameters of pension assessment and indexation, which will lead to a partial reduction in replacement rates in the longer term,” the council said.

It also said measures should be taken to increase the number of people in the labor market, including limiting opportunities for early retirement.

The third pillar is dysfunctional

At the same time, NBC is calling for modifying the third pillar of the pension system to compensate for the replacement ratio reduction partially.

In particular, the Council identifies as problematic the current propensity to make lump-sum withdrawals and the insufficient proportion of younger participants who should save for a substantial part of their working lives.

“The current design of the third pillar is largely dysfunctional, as the high government costs associated with direct and indirect support are not reflected in any increase in the number of people using their savings as a regular additional source of income to their state pension,” the council said.

In its opinion, the Council also warned against extending automatic indexation to other items in the state budget, such as introducing increases in the care allowance or the guarantee of 130 percent of the average salary for teachers.

“The NBC considers the above approach highly risky as it reduces the manageability of public finances and limits the government’s decision-making space. Especially in a situation where public finances are unbalanced, this system will lead to the continuation and deepening of negative trends,” the council said.

The National Budget Council is an independent expert body whose primary mission is to assess whether the state and other public institutions comply with the fiscal responsibility rules set by law.