Z E S Z Y T Y N A U K O W E P O L I T E C H N I K I P O Z N A Ń S K I E J
Nr 73 Organizacja i Zarządzanie 2017
Jaroslav VOSTATEK*
CZECH PENSION REFORMS AND THEIR BACKGROUND
DOI: 10.21008/j.0239-9415.2016.073.19
Czechoslovak old-age pensions were heavily earnings-related. The 1996 reform confirmed
the trend to the flat-rate pensions. The Executive Team for the preparation of the
reform (2005) analysed the reform concepts of individual political parties, mainly by the
modelling of expenditures and receipts, not by their systemic analysis. They blew away the
NDC scheme, recommended by the World Bank to us, with inappropriate parameters. Later
the lobbyists᾿ Expert Advisory Forum (2010) concentrated on the support of „diversification“,
aiming at the introduction of mandatory pension savings. Under the influence of different
political and economic interests the Government decided for the „voluntary“ opt-out + addon,
its successful realization was made impossible basically by the very existence of, in
a sort of way, a strong supplementary pension insurance and by not permitting the use of
life insurance sales model in the new „retirement savings“ scheme. Today no political party
struggles for a paradigm pension reform, unsystematic partial parametric changes are practised
only. The main pension expert of the Trade Unions Chamber and of the Czech Social
Democratic Party has favoured a neo-liberal soft-compulsion type of personal pensions.
Keywords: pension reform, public pensions, personal pensions, World Bank,
Czech pension insurance, pension funds
1. INTRODUCTION
In its relatively brief history, Czechia has made several pension reforms of different
shapes and sizes, motivated by various economic, political and social interests.
Very different and changing positions can also be seen with individual influential
political parties. The aim of this paper is to analyse the direction and influence
of the main actors on the pillars of the Czech pension system, in the context of
development of the pension theory.
*
University of Finance and Administration, Prague, Czechia.
Jaroslav Vostatek290
2. PUBLIC PENSIONS
In the previous, predominantly uniform communist pension system, the newly
awarded old-age pensions were mostly dependent on final salary, the system included
also “preferred work categories” (miners and other higher risk-involving
professions) and it discriminated almost non-existent private farmers and entrepreneurs.
With these exceptions, it was a universal defined benefit pension system and
the pensions were calculated from the final salary (average salary of the best three
years in the last ten years). In 1989, after 45 years of covered years, a common
employee with national average earnings (NAE) received a rather high pension of
85-90% from the net wages. However, after 20 years of receiving the pension,
he/she may have expected a pension at the minimum level (“social pension”),
which would be equivalent to current CZK 8,000 (37% net NAE). The relation of
the nation-wide average pension and net salary was then at 64%, the relation to
gross salary was at 50%, with a typical phenomenon being an inadequate indexation
of pensions; their insufficiency was mostly caused by the so-called hidden
inflation (long-term average of the hidden increase of retail prices was approx.
2.5% annually); one-off campaign-like increases of pensions did not take these
price increases into account. Bend points were applied to reduce higher earnings
for the pension calculation; the existing reduction coefficients (percentages) have
been kept until 2010, with a minor variation. However, the first bend point in 1989
was at 92% of the median salary, which was by 78% more than in 2010. Up to the
first bend point, the salary has not been reduced when calculating the pension. Officially,
the Communist system was defined as a state “pension security”: not
a social insurance scheme but a public expenditure program financed from state
budget, with a strongly Bismarckian construction of pensions.
2.1. Inflation as an instrument of liberal policy
After the Velvet Revolution, the discrimination of entrepreneurs was abandoned
and in principle, the privileged categories of workers were cancelled. The real level
of paid-out pensions in relation to salaries dropped, despite the introduction of
regular indexation of pensions. The social pension has not been indexed until its
cancellation in 1995, and its real value in this period dropped to 16% net NAE.
Following 1992, there have been deliberate shifts in progressivity (solidarity) in the
universal system of pension security because of significant shift of real bend points
downwards (to the level almost comparable with the basic pension system in the
USA). This can be related to promoted liberal tendencies that may have resulted in
the transformation of pension security into a flat-rate, universal pension.
Czech pension reforms and their background 291
Since the 1996 reform, the Czech “pension insurance” has included a uniform,
flat-rate “basic amount” of all pensions. By the recent “small” pension reform, this
basic amount was parametrised to 9% of the general assessment base, or NAE respectively.
The “percentage amount” of the pension is the second component; for
old-age pensions it is calculated from average earnings (since 1986), valorised to
the current salary level and subsequently reduced by applying reduction rates. The
percentage amount of the old-age pension is significantly a “progressive” allowance,
owing to the system of bend points and coefficients that was formally taken
over from the pre-revolution pension security and in fact, regarding its content, it is
a variant of the basic US public pension system, being a derivative of a liberal,
Beveridgean state pension. Following 1996, there have been minor corrections
of the relation of the basic and percentage amounts in the framework of their
indexation.
The Czech basic amount of pensions is a rarity all around the world. We know
how it came to being – from the state compensatory allowance; which continues to
exist in this form for more than 20 years, for no reason. 9% NAE (CZK 2,550
monthly in 2017) is a significant amount for pensioners, however it is not enough
to cover sustenance, not to mention housing costs. The basic amount of pensions is
not comparable with basic pension assessments in former worker systems of pension
insurance. The major difference lies in the fact that the basic assessment
(in the given amount) was added to the "percentage assessment“ of the pensions
(dependent on earnings, naturally with no reduction applied) in the total undivided
assessment of the pension when calculating the pensions; the assessed pension was
(or was not) indexed as a whole. This is a major difference which influences the
illogical and incomprehensible nature of Czech indexations when the index of the
increase of the total average old-age pensions is defined and the increase of the
basic amount arises from updating the amount of 9% NAE. From the mathematical
point-of-view, it may be an unsolvable exercise, as the index of increase of percentage
amount of pensions is in fact derived from what remains after updating the
basic amount of pensions.
2.2. Proposed concepts of pension reforms
In the world, social pension insurance systems have undergone changes in recent
decades that strengthen links to life-long earnings, including the transition to
NDC schemes with personal client accounts where valorisation of the paid premiums
is performed, e.g. according to the development of the volume of nominal
salaries in the economy, until such (notional) funds are finally converted to old-age
pensions using actuarial principles. When reconstructing the defined benefit (DB)
system to a NDC scheme, the system is significantly "cleared" from different, even
politically motivated “innovations” of DB systems, such as dual statutory retire-
Jaroslav Vostatek292
ment ages, connected with dual minimum insurance periods. That is why I considered
NDC as one of the main opportunities to modernize social pension insurance
in our country (Vostatek, 2002). „From a political economy point of view the NDC
pension scheme is by far superior to the traditional pension schemes, just for its
rule-oriented institutional characteristics. … the traditional parametric approach
allows for discretionary measures, whereas the NDC rate of return is generated
directly by economic and demographic factors and there is no administrative discretion
involved other than what can be applied to fully funded schemes” (ChłońDomińczak,
Mora, 2006, p. 558).
In 2002, the World Bank prepared a comprehensive analysis of the Czech pension
system. „The paper examines two main alternative reforms to the PAYG
scheme that would bring stability to the pension system in the long-run. The first
would involve a set of strong parametric reforms to the DB scheme. … Alternatively,
the DB system could be gradually transformed into an NDC system. … The
NDC scheme would also automatically ensure a tighter link between benefits and
contributions, which may be an objective of the reform. Attaining the same results
in the DB scheme would require more changes in the benefit formula which may
be more difficult to implement” (Lasagabaster et al., 2002, pp. 24-25).
The combination of NDC scheme with flat-rate pension was recommended to
the Czech Ministry of Labour and Social Affairs by the advisor to the World Bank,
Chłoń-Domińczak (2003), as an alternative to NDC, supplemented by a minimum
pension. The same proposal was published by Chłoń-Domińczak together with
Mora (2006) in an extensive monograph of the World Bank. The proposed flat-rate
pension should have been at 25% NAE and the rate of premiums paid into the
NDC pillar should have been 12%.
In June 2004, a team of experts of political parties was established, with Bezdek
becoming the coordinator of the Executive team for the preparation of documents.
„The main objective of the independent group of experts is to carry out calculations
of the pension reform proposals put forward by the political parties. The Social
Democrats propose a shift to a notional defined contribution (NDC) PAYG system.
The Christian Democrats and Liberals suggest a parametric reform of the PAYG
system and a possibility of partially opting out to a FF system. The Civic Democrats
support the introduction of a flat-rate pension, while the Communists would
like to continue with parametric reforms of the current PAYG system” (Mora,
2005, p. 5).
In their general form, all the above concepts of pension reforms are fully legitimate
– from the perspective of pension theory and policy. The flat-rate pensions at
20-40% NAE is a modern liberal pension welfare regime, and the same flat-rate
pension in combination with a universal social insurance scheme represents the
original version of the social democratic pension welfare regime. The NDC scheme
is a modern universal social insurance system which is fully compatible with the
flat-rate or means-tested pensions. Even though, parametric reforms of the current
Czech system are possible, but not effective enough, since (former and current)
Czech pension reforms and their background 293
public pensions are an incomprehensible mix of solidary and insurance pillars – in
a situation when pension theory recommends their strict separation – into two independent
pillars. Even the neo-liberal welfare regime (based on mandatory private
savings), ideally without state regulation, can be considered legitimate. The fundamental
problem of the neo-liberal pension welfare regime is its low (even negative)
effectiveness for clients.
2.3. NDC case: everything can be ruined and abused
Hajek and Samek, the experts of the Czech Social Democratic Party (CSSD),
proposed to introduce gradually a NDC scheme in combination with the minimum
pension at 29.45% (since 2040 27%) NAE. The assignment for the Executive Team
counted with increasing the retirement age until 65 years by 2030 (men), or 2033
(women). In the projection, the team concluded that there will be a drop in the replacement
rate down to 27% in 2100. The drop is caused mainly by capping the
statutory retirement age in circumstances of continuously extending life expectancy.
The team also explicitly noted that in reality it may be possible that the people
would postpone the retirement with an aim to increase their replacement rate. Thus,
there may be cases of people voluntarily extending their effective retirement age
which is promoted by the system settings. Longer contributory period will be fully
reflected in the amount of the assessed pension (Bezdek et al., 2005). The text of
the following paragraph is as follows: “Approximately 60% of newly granted NDC
pensions will be in the long run under the poverty line (approx. one fourth of the
average salary in the economy)”. This sentence alone only reproduces the preceding
text, but it fails to repeat the fundamental assumptions, that it concerns the end
of century and that the reason of this is the statutory retirement age cap. The artificially
increased NDC overhead costs to 2.1% from the expenditure of pensions
were a secondary reason.
The NDC scheme alone has no relation to any specified poverty line. Yet, NDC
pension is fully dependent on how high premiums are or would be paid in the long
run – under the given economic and demographic conditions. Also, the state (and
other insurance systems) contribute to client NDC accounts, e.g. in the period of
early child care.
In recent years, Bezdek tries to disqualify NDC referring to analyses of the Executive
Team: “We considered the NDC system as early as in 2005. This system
does not simply turn out well in the Czech circumstances, because it would result
in enormous range of the pension amounts, and in addition, it would get majority of
people under the poverty line” (Taborsky, 2010). However, nowhere in the world
the NDC scheme provides an “enormous range of pensions amounts”, as in practice
(also here) earnings caps are used; the World Bank recommends setting the cap at
150-200% NAE. At the same time, the NDC scheme gets nobody under the poverty
Jaroslav Vostatek294
line, as this is not relevant to a NDC product at all; solidarity belongs to solidary pillar.
NDC system may not “turn out” bad, the NDC scheme can only be fed with improper
parameters and supplements, which exactly happened in projections in 2005.
Clearly, capping the retirement age at 65 years of age was a wrong parameter.
Samek provides similar arguments as Bezdek: “An NDC option for the Czech
Republic was analysed in detail based on the assignment by CSSD already by the
first Bezdek Commission in 2005 when it appeared that the taking of costly compensatory
measures in the Czech Republic (e.g. introduction of the minimum pension)
would result in the increased number of very low pensions (below the subsistence
level) and thereby to the fall of many pensioners into poverty at the time of
the pension award. The new Bezdek commission took this into account and as
a result, decided not to recommend the NDC reform to be deployed in the Czech
Republic” (Samek, Hajek, 2010).
The combination of the pension fully dependent on earnings or paid premiums
with a relatively high minimum pension can be deemed as problematic – in principle,
the link of the pension to earnings disappears with most insureds. E.g. the income-tested
pension benefit in the form of a guarantee pension in Sweden or similarly
designed pensions e.g. in Norway, Finland or Chile which do not pose practical
problems argued by Bezdek are something different. At the same time, 55% of
pensioners in Sweden receive guarantee pensions, in Australia, the means-tested
Age pension was received by 75% of the elderly. NDC and other products of social
old-age insurance is exclusively earnings-related and may not pose problems in
combinations with the solidary pillar.
The assignment of the pension reform by CSSD in 2005, evaluated by Bezdek
team, did not sufficiently correspondent to the then state of the art and recommendations
by the World Bank. For these reasons, the “result” arrived at by Bezdek
team is irrelevant even today. NDC is a superior product. The second Bezdek
Commission was dominated by lobbyists – and they clearly defy the transparent
NDC scheme with a relatively low premium rate: they prefer current nontransparent
Czech “pension insurance”. The worse public pensions, the better they
explain that mandatory private pension savings working, as a model, on the principle
of equivalence, must be introduced.
The treatment of the NDC system by Bezdek team proves that every model of
public (and private) pensions may not “turn well”, if it is fed (knowingly or unknowingly)
with improper parameters. In Sweden and other countries, the NDC
system proved successful.
2.4. Enforced small pension reform
The Constitutional Court of the Czech Republic came down to the history of the
Czech pension policy by its ruling in 2010. The court declared the valid bend
Czech pension reforms and their background 295
points unconstitutional, as “in their effects, and in combination with other parameters
and existing design of the pension system they do not guarantee the constitutionally
granted right to adequate material security … and result in an unacceptable
inequality among different groups of the pension insured” (Constitutional Court,
2010). In this connection, the Court noted that "whole complex design of the pension
system is non-transparent to a degree that it is de facto incomprehensible for
its addressees; and for the majority of the insured the calculated amount of the pension
benefit becomes unverifiable“. The same is true up to this day.
The ruling of the Czech Constitutional Court should be a major lesson for the
Czech pension policy. The impulse was a complaint of one disabled pensioner
regarding his low replacement rate, particularly 19% of his personal assessment
base – which, in his opinion, was not an adequate material security, which is declared
as a right in the Charter of Fundamental Rights and Freedoms. The claimant
considered it an inequality – in a situation when the average replacement rate for
all old-age and disability pensions amounted to 44%. The Constitutional Court
verified the claimants position because since 1996 there had been a system of
“public social insurance” in this area. The Court thus inferred the core of the system
from the title of the act – on “pension insurance”. The term public pension
insurance or social pension insurance is not legally defined in our country, not to
mention the phrase “public social insurance”. At the same time, the Court did not
decline the intra-generation redistribution related to the existence of bend points
and coefficients. The court repealed paragraph 15 of the Act on Pension Insurance,
containing bend points used to determine the reduced personal assessment base for
the purposes of calculation of the percentage amount of the pension, and forced
government to act swiftly.
Fig. 1. Net pension dependence on monthly gross wage in 2011 and 2015
(45 years of insurance)
Jaroslav Vostatek296
The Necas government implemented “small” pension reform which reintroduced
bend points and subsequent reduction coefficients, setting these parameters
in a manner to reinforce the principle of equivalence between the amounts of pensions
and earnings. The government did so reluctantly (“enforced measure”), as
it preferred a different policy – gradual transition to a flat-rate pension, e.g. at the
level of CZK 6,500.
In principle, during the small pension reform, the second bend point was cancelled,
or more precisely this bend point more than tripled: from 109% NAE in
2010 to 400% NAE in 2015, and moreover, it in fact merged with the earnings cap
of 400% NAE. The key parameter for the degree of dependency of the pension on
earnings has been only the first bend point that has been also newly parametrised,
to 44% NAE – see Figure 1. When calculating the percentage amount, the earnings
above this point are included from 26%, below this point 100%. The first bend
point with low parameters (44% NAE and inclusion of 26% over 44% NAE) continues
to be a decisive factor characterising the Czech “pension insurance” as
a predominantly non-insurance system of the Beveridgean type. After the small
pension reform, the percentage amount is only slightly more transparent and understandable
– due to factual removal of one bend point. However, in this regard no
major reform took place, as solidarity still prevails over insurance principle in the
system of “pension insurance”; the ruling of the Constitutional Court was not duly
respected here.
2.5. Czech diversification: conflict of interests and politicians
In 2010, the Czech government decided to “diversify” the pension system by establishing
the so-called “second” pension pillar. This pillar was prepared in haste.
Not only the opposition but also the President Klaus who, being a liberal, deemed
this pillar as excessive and created in the interest of relevant financial groups and
stood against the reform. The initial, in principle a marketing material only, was
drafted by the “Expert Advisory Forum”, composed mostly from lobbyists. This
so-called second Bezdek Commission recommended to introduce a mandatory
pillar following partially the Swedish model (“premium pension”), with taking 3%
of the salary from the state budget and providing of annuities by the insurance
companies. The proposal was in line with interests of medium and small financial
groups and was supported by the National Economic Council of the Government,
in which lobbyists also prevailed. Following the approval of the intent by the government,
a negative response of the President Klaus followed and the smallest coalition
party forced a change in the concept to voluntary opt-out. The new concept
was prepared by former managers of large financial groups and this concept no
longer included Swedish elements. Those who opted-out, had to contribute additional
2% of their gross salary (add-on), the reason was not given by the govern-
Czech pension reforms and their background 297
ment. We may thus only assume that interests of private sector were followed. At
the end of 2011, the relevant laws introducing reform were passed by a small majority
of votes in the Parliament.
In principle, the reform did not stand a real chance – as, both the results of similar
reforms abroad were known, and obvious lies in the government campaign to
support the reform did not help either. A certain role was played by the regulation
of commissions; a well-meant regulation fired back against the take-off of the reform.
The mentioned add-on had also a negative effect. Overall, it turned out that
insufficient knowledge of (pension) economics does not pay off. In 2016, this new
pension pillar (with mere 85,000 participants) was cancelled.
3. PERSONAL PENSIONS
The establishment of the Czech “state-contributory supplementary pension insurance”
in 1994 followed the openly and the disguised implementation of a pension
reform – owing to the inflation in 1990s the real value of old-age pensions
continued to drop rapidly and the liberal government refused the transition to social
insurance and the introduction of occupational pension schemes. The transparent
state contribution to supplementary pension insurance provided in addition to contributions
by the employer became a significant support of the development of
personal pensions – in terms of the number of participants of the new system.
3.1. Special life insurance companies for a simple savings product
Supplementary pension insurance was originally developed at the Ministry of
Labour and Social Affairs (MoLSA), with an assistance of US advisors, as a product
for occupational pension schemes, provided by autonomous, non-profit pension
funds. When the Prime Minister Klaus swept this proposal under the table, the
Ministry swiftly reworked the draft for personal pensions with state contribution
provided by pension funds, plc. This resulted in the emergence of new financial
institutions providing exclusively the product falling under the category of universal
life insurance, without the usual accounting of (private) life insurance companies.
Thus, new life insurance companies sui generis, using simple bookkeeping,
typical for autonomous pension funds, were established.
The universal life product was very simple: it was using personal accounts of
the clients to which his/her contributions (as well as any contributions of the employer)
and state contributions were credited. Nothing was deducted from the personal
account of the client, no fees were introduced, they were not even allowed. In
Jaroslav Vostatek298
principle, it was a savings account, to which at least 85% of the fund profit generated
in the preceding year was credited.
Each pension fund provided only one pension plan of this type; therefore, it was
a very simple and understandable product, and with some exceptions, it was in fact
savings account with interests accrued ex post – following the end of calendar year.
The product may have included a classic defined benefit disability pension, with
a separately determined premium (contribution), however, none of the pensions
funds had ever offered such supplementary insurance. The defined contribution
disability pension was a common part of the product, benefit upon disability consisted
in a simple withdrawal of the savings.
For the provision of the supplementary pension insurance, a common sales
model of life insurance was used, with gradually increasing commissions for the
intermediaries. From the originally competitive market of supplementary pension
insurance (up to 44 pension funds, plc.) the mergers created a noticeable monopoly
structure of 9 pension funds in 2012, owned by 8 financial groups; with 3 largest
pension funds having over 54% of all clients.
In a standard market economy, the product of supplementary pension insurance
would be mostly provided by life insurance companies, followed by banks and
perhaps also mutual funds. However, there was a lack of will in this regard when
the supplementary pension insurance was emerging, with the reason being an undeveloped
insurance market with Ceska pojistovna (Czech Insurance Co.) having a
market share of 87%. Regarding banks and mutual funds, nobody thought they
might be involved. Later, when all major players got used to the existence of (insufficiently
regulated) pension funds as a specific component of the financial
group, with essential activities being usually outsourced to affiliated companies.
The profit margins of financial companies were higher than in Western countries.
With the significant development of the supplementary pension insurance market
and inclusion of pension funds in several decisive financial groups, new lobbying
networks emerged.
3.2. Different state support for different or even identical products
Because of lobbying, a significant differentiation of the state support of personal
pensions occurred towards the end of 1990s – tax deductibles for supplementary
pension insurance were introduced (in addition to direct state contributions) and for
private life insurance (legislative abbreviation for life insurance with a savings
element), provided by life insurance companies. The system of support to contributions
of the employers was dramatically modified and intensified.
The “large” reform of supplementary pension insurance undertaken from 2013,
locked the rather simple and understandable product in “transformed funds” of
newly constituted “pension companies”, thus eliminating the competition in this
Czech pension reforms and their background 299
important “market” segment). The newly introduced “participation funds” go hand
in hand with ideas of neoliberal policies from 1990s, according to which the freedom
of choice from mutual funds with different degree of the investment risk
(borne exclusively by clients) is an optimal solution both for mandatory and nonmandatory
personal pensions. The introduction of fee limits for pension companies
is the only benefit of this reform of personal pensions for their clients.
The fundamental problem of the current Czech personal pensions are blatantly
different conditions for two types of products (supplementary pension insurance
and supplementary pension savings vs. life insurance) and their providers (pension
companies, life insurance companies). The dimension of these unequal conditions
means unconstitutionality of the entire pension pillar. The total state support of
personal pensions is the highest in the world – mostly because the tax deductible is
not accompanied with the full taxation of the resulting benefit. The fees of life
insurance companies are not regulated by the state at all. Even if the life insurance
company would sell an exact copy of the supplementary pension savings, the clients
will not receive the same state support. This is a fundamental problem of the
desirable functioning of the market. However, the large financial groups do not
mind it because they have specialized daughter companies for “different” products.
Contributions of employers, exempted from paying social security premiums, are
the most favoured ones. At the same time the products of pension companies and
life insurance companies are made equal as for the contributions of employers – the
state support is the same amount and moreover, these products "share" a single
annual exemption limit of the total annual contribution of the employer (for each
employee).
3.3. Neo-liberal policy of social-democratic experts
A parallel existence of state contributions and tax deductibles with products of
pension companies, if the client pays more than CZK 12,000 annually, is an absurdity
of global scale. In general, we have got used to such blatant violations of
equality of conditions for individual products, their providers and clients – event
though it is a dimension resulting in the unconstitutionality of the whole pension
pillar. In principle, everything is a result of lobbying – starting the end of 1990s
and ending the recent complementary act to the act cancelling (second-pillar) retirement
savings when many talks about the need to motivate citizens to higher
pension savings resulted in higher margins of pension companies for the closed
supplementary pension insurance where the clients are basically totally helpless,
owing to an extraordinary effort of two highly involved CSSD members of parliament
(Zavadil, Votava). This is no big surprise due to the fact that the main CSSD
expert on pensions, Samek, is a long-time supporter of the neo-liberal “second
Jaroslav Vostatek300
pillar” in its “soft” mandatory form; this was clearly manifested in its “minority
version” of the Expert Advisory Forum that comprised (PES, 2010):
– the 2nd
pillar will be operated by reformed pension funds,
– the direct state support will reach 3 p.p. of premiums on condition that the
participant will save at least the same amount,
– the entry in the 2nd
pillar will be voluntary, however then the participation
and payments of premiums will be mandatory,
– as part of the 2nd
pillar, the investment management of pension savings will
be provided by the reformed pension funds that will offer the participants more
pension plans with different investment strategies,
– the participation in the new system will only be possible if the contribution
by the participant will reach at least the above mentioned 3 p.p.,
– the existing pension funds will have pension plans for participants in the
supplementary pension insurance who will not become participants of the 2nd
pillar
under current conditions.
Samek minority version does not contain information about financing state subsidies
in the second pillar, the presentation even claims that the expenses for the
support of this pillar are expenditure on public pensions! Samek neo-liberal concept
of the second pension pillar is very close to the concept of the second pension
pillar that was cancelled last year. Both use the “opt-out” – a soft compulsion
method. “The advantage of soft compulsion mechanisms is that the potential contributors
retain the right not to participate but the mechanisms guide them in a direction
that encourages participation” (Rudolph, 2016).
The state support of personal pensions is in principle a fiscal illusion only (the
middle class will pay the support immediately in higher taxes), it does not generate
higher total savings of clients – they only perform tax optimisation: by relocating
their savings with a view to the yield including the state support. Especially, in
a situation of average real investment yield close to zero, the state support is transformed
mostly in margins of financial institutions and increased taxation of income
or consumption.
A fundamental reform of supplementary pension savings and insurance is necessary.
The optimal liberal and social democratic policy in Czechia would mean
to cancel the chaotic and unconstitutional Czech system of subsidising supplementary
pension savings, private life insurance and other financial products and a corresponding
decrease of the personal income tax rate. The minimum policy is to set
equal conditions for all products, their providers and clients, including employers.
4. CONCLUSIONS
The Czechoslovak pensions were highly earnings-related. The reform of 1996
confirmed the liberal policy aiming to equalize the pensions. The Executive team
Czech pension reforms and their background 301
for the reform preparation (2005) analysed the concepts of reforms of individual
political parties. The NDC system proposed by Social Democrats was not sufficiently
compliant with the internationally recommended concept and lobbyists
keep abusing it up to this day, as the fundamental rationalization of the current
Czech system of public pensions prevents them from promoting neo-liberal concepts
of personal pensions. Discussions about the NDC system confirm that any
pension system can be "killed" by improper parameters. The later lobbyist Expert
Advisory Forum focused on the support of "diversification", with an aim to introduce
mandatory pension savings, operated by reformed pension funds. Samek “minority
version" also represents a neo-liberal concept of the "second" pension pillar
– the only difference is that is uses "soft" compulsion as opposed to "hard" compulsion
methods. This neo-liberal concept remains an actual pension policy of the
Czech Social Democratic Party – the state support of private pensions is to be developed,
despite being the highest in the world. Under the influence of different
political and economic interests, the previous government decided to introduce the
"second" pension pillar in a form of voluntary opt-out + add-on (a soft compulsion
system); however, the government was not utterly able to handle the reform and the
new pension pillar was soon cancelled. Nowadays, both existing Czech pension
pillars require a major reform.
ACKNOWLEDGEMENT
The paper was prepared as part of solving the student project “Improvement of the pension
system as an intensification factor of the economy”, using a specific grant for a specific
academic research of University of Finance and Administration.
LITERATURE
Batty, I., Hailichova, H. (2012). Major pension fund reform in the Czech Republic: Creating
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CZESKIE REFORMY EMERYTALNE I ICH UWARUNKOWANIA
Streszczenie
Czeskie reformy emerytalne miały wzmocnić funkcje świadczeniowo-dochodową systemu
emerytalnego. Reformy roku 1996 miały wyrównywać poziom otrzymywanych emerytur.
Zespół reformatorów roku 2005 przeanalizował koncepcje dalszych reform wysunięte
przez partie polityczne pod kątem rozchodów i przychodów finansów publicznych. Poddali
oni miażdżącej krytyce system NDC zaproponowany przez Bank Światowy. Reformy
roku 2010 miały zdywersyfikować instrumenty finansowania emerytur i wprowadzić obowiązkowe
oszczędności emerytalne. Ostatecznie wprowadzono opcję wyjścia z systemu
kapitałowego. System kapitałowy nie rozwinął się jak oczekiwano ze względu na dużą
konkurencję uzupełniających systemów emerytalnych oraz brak formy kapitałowej z ubezpieczeniem
na życie. W późniejszych latach nie było reform emerytalnych, a jedynie korekty
parametrów systemu emerytalnego.
Słowa kluczowe:reforma emerytalna, emerytura publiczna, emerytury prywatna,
Bank Światowy, czeski zakład ubezpieczeń emerytalnych,
fundusze emerytalne