Czech Republic kicks off pension reform

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Czech lawmakers gave their initial approval on 13 July to a pension bill that bucks a trend of unravelling retirement reforms in some EU newcomers but has triggered protests and hurt the government's popularity. EURACTIV Czech Republic contributed to this article.

The bill is the Czechs' first major attempt to overhaul their publicly funded pension system since the fall of communism.

It will allow workers to divert three percentage points of the 28% social insurance tax which they currently pay into the public system into privately administered funds instead. They must supplement that with another 2% of their salaries.

With 115 of parliament's 200 seats, Prime Minister Petr Ne?as's three-party coalition is expected to win final approval for the reform package in two more readings expected by August.

The bills will then head to the Senate, where the leftist opposition parties have a majority and have vowed to reject them. But Ne?as's allies can override those decisions with their majority in the lower house.

Investors have mostly welcomed the plan and say it sends a better message than the seizure of pension assets by Hungary's government and Poland's diluting of the privately funded portion of its pension scheme to plug large budget deficits this year.

But they say the Czech reforms are weaker than originally hoped and fewer people may subscribe, which means planned budget consolidation goals may not be reached.

"Without this step, the Czech pension system will collapse in 30 years," Ne?as told parliament.

The bill's opponents say that while richer workers can keep this portion of their tax contributions for themselves, it will erode funding for the pay-as-you go system and hurt those who make less than the average wage of €11,500 a year.

The opt-out cost will be covered by unifying two separate rates of value added tax at 17.5% in 2013, angering many Czechs as it pushes up costs for books, staple foods and other items.

Protests

Aiming to balance the budget by 2016, the government has pursued an austerity campaign by raising taxes and reducing the state payroll and other costs, measures investors say make the country one of the most fiscally stable in the region.

The government says the worker-to-pensioner ratio would fall from almost two to one now to only one to one in 50 years, putting significant strain on the budget if no remedial action is taken.

But the law, along with unpopular healthcare reform that raises patient costs, has cut the popularity of the parties in Ne?as's right-of-centre coalition to a combined 40% in a June poll, from 53% nine months earlier.

Last month, thousands of public transport workers struck over the reforms for the first time in the country's post-communist history.

And on Tuesday, some 800 union activists protested against the health reforms at the Health Ministry and parliament, shouting insults at Finance Minister Miroslav Kalousek and pelting Health Minister Leos Heger with stones.

The government expects about half of working Czechs to join the private scheme, which would at first cost the government about 20 billion crowns (€818 million) per year in lost revenue.

But critics say the plan should be made compulsory, and the number of those volunteering for the scheme will be closer to 20 to 30%. Economists, however, were mostly upbeat.

"We could have seen a better reform. But finally we are seeing some reform, and we're getting this out of the way," said Lars Christensen, chief analyst at Danske Bank.

Pension reform has become a contentious issue across the region this year. Hungary's government has seized €9.8 billion in private pension assets to retire debt and finance spending and Poland's has reduced funds transferred to private accounts.

EURACTIV with Reuters

"The weakness of the Czech government is the fact that more than 95% income of the pensioners comes from the state system," said Jaromír Drábek, Czech minister of labour and social affairs. "We need a system of funds where the contributing will be combined with gainful employment."

Opposition Social Democrat (?SSD) chairman Bohuslav Sobotka said the reform was destined only for the rich because savings in pension funds would only be advantageous for people with a gross monthly income of over 40,000 crowns. He called the reform "the government's experiment".

"We asked the prime minister and his government to leave the idea of the second pillar of the pension reform. We are persuaded this step will lead to the destabilisation of the public budget and to strengthening the injustice in pension scheme," Sobotka said

Petr Ne?as, the Czech prime minister, said his government wanted to be "neither irresponsible nor cowardly". He indicated that his cabinet had agreed with the opposition on creating a working group of experts to deal with the controversial parts of the pension reform.

"In some parts of the pension reform we share common interests therefore we have agreed on creating the working group of experts comprising representatives of government and the ?SSD [the opposition Czech Social Democratic Party]. I want to emphasise that beside these negotiations on the expert level, there will be other ones on the political level," Ne?as said.

At an EU summit in October 2010, a group of nine EU member states from the former communist bloc demanded that the cost of reforming their costly pension systems be taken into account when calculating their public debt and deficit.

The call was supported by Poland, Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Romania and Slovakia as well as Sweden.

However, they failed to secure a majority to get their proposal through.

Struggling with budgetary pressure at home, Hungary has nationalised its pre-funded pension schemes and excluded the cost of the reforms from its public debt figures. Bulgaria has taken similar measures.

The so-called Stability and Growth Pact for the euro area sets a ceiling of 3% of gross domestic product (GDP) on government deficit and 60% of GDP on public debt.

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