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Prague – The imbalance of the pension system is the biggest problem of Czech public finances. In its regular quarterly statement on the state of public finances, the National Budget Council (NRR) stated this today. According to her, in order to stabilize the system, it will be necessary to change the form of pension valuations, gradually increase the retirement age and change the parameters of pension assessment. At the same time, the third pillar of pensions, in which people save privately, will need to be adjusted, as it is largely dysfunctional in its current form, the council said.
With the reduced extraordinary valuation of pensions, the deficit of the pension system will reach 70 billion crowns this year. If the president vetoed the reduction in valuation and the House of Representatives did not override the veto, the deficit would be 90 billion crowns, the NRR said. “This imbalance arises despite a relatively favorable demographic structure and is dominantly caused by the setting of the valorization mechanism, which in conditions of high inflation and a drop in real wages leads to significant deficits in the pension account and to the motivation of people of pre-retirement age to retire early or apply for them.” the council said in a statement.
According to the NRR, it is necessary to adjust the form of extraordinary and regular pension valuations. According to the council, the current one-off change in the June valuation is not enough, a systemic adjustment is needed.
Due to the upcoming retirement of the baby boomers, according to the NRR, it will be necessary to proceed with a more extensive adjustment of the pension system. “However, this cannot be done without adopting unpopular changes, which include, in particular, a gradual increase in the retirement age above the 65-year-old threshold and adjustments to the parameters of assessment and valorization of pensions, which in the longer term will lead to a partial reduction of compensation ratios,” the council said. According to her, it is also necessary to take measures to increase the number of people on the labor market, including limiting the options for early retirement.
At the same time, the NRR requests the adjustment of the third pillar of the pension system, which should partially compensate for the reduction in the replacement ratio of pensions. The board considers the current tendency towards one-off withdrawals of saved money and the insufficient share of younger participants, who should save for a significant part of their active lives, to be problematic. “The current form of the third pillar is largely dysfunctional, as the high costs of the government sector associated with direct and indirect support are not reflected in any increase in the number of people who use their savings as a regular additional source of income to the state pension,” the council said.
In its opinion, the Council also warned against the extension of automatic valorisations to other items of the state budget, for example the introduction of an increase in the care allowance or a guarantee of 130 percent of the average salary for teachers. “The NRR considers the above approach to be 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 professional body whose main mission is to evaluate whether the state and other public institutions comply with the rules of budgetary responsibility laid down by law.