A nation grows older together

The balance between able-bodied workers paying into the pension system and retirees drawing from it is shifting in an alarming direction that will not be sustainable without serious changes.

An increasingly high budget deficit and an aging population have made sweeping reforms of the pension system one of the most pressing economic and political agendas for the next government if the country is to stay afloat and care for its retirees, warns a growing number of experts. The Czech Republic's demographics are on par with a costly trend in post-communist countries of a shrinking birthrate and expanding lifespan.

The International Monetary Fund's (IMF) comprehensive report on the Czech economy, published Jan. 25, highlights the "long-term fiscal challenge" posed by the outdated, pay-as-you-go Czech pension system. Rising unemployment - expected to peak at 10 percent this year - coupled with the rapidly rising average age of the Czech population, will increase social spending 6 percent over the next 50 years to approximately one-quarter of the gross domestic product (GDP), making pension reform both an immediate and long-term necessity, according to the report.

"Over the medium term, consideration should be given to moving to a fully funded second-pillar private pension scheme ... through upfront fiscal consolidation measures or any privatization revenues," the report says.

The IMF's report comes on the heels of the latest statistics from the Finance Ministry, which found a 30 billion Kč deficit in the pension system for 2009, owing especially to an increase in unemployment. According to Radek Ležatka, a ministry spokesman, the future of the pension system depends on the domestic economy's growth, but significant reforms are a necessity, as the government has to pay out pensions whether or not they are fully supported by revenues.

"It is clear the pensions have to be paid even if there is not enough money in the pension fund, which is what happened last year," he said.

The bottom line of the outdated pension system concerns the 2 million people who live on the government's allowance. Miroslav Nestroj of Opava retired in 2003, but has since been forced to work part time as a watchman at an industrial park to supplement his 13,000 Kč ($700) per month pension.

"I want to earn a little extra because the pension is not that large when I have to pay for the apartment, bills, the car and the garage," he said. "Since they've increased the cost of everything, I have to keep working."

The existing pay-as-you-go pension system means social security payments from currently employed persons fund current pensions. Problems have arisen over the past decade as the population ages due both to an increased life expectancy and a lower birthrate, meaning more retirees are dependent on fewer young employees to fund their pensions. According to Jitka Rychtaříková, a sociologist at Charles University's Faculty of Science, the population is set to age even more drastically over the next few years, which will mean more retirees vying for fewer funds.

"Within the next 20 years, the number of Czechs over 65 will nearly double, and those over 80 will nearly triple. The Czech Republic will become one of the oldest countries worldwide," she said. "Like all post-communist countries, there is an extremely low birthrate here, and women are increasingly postponing their first child."

Such predictions make the need for pension reform even more urgent, and many economists warn greater changes must be made to integrate the pay-as-you-go system with a fully funded system in which payments would be higher for individuals with fewer children. Martin Lobotka, an analyst at Česká spořitelna, said the government needs to cut spending up to 100 billion Kč to pay for the necessary pension reforms, which could take up to 15 years to fully implement.

"We need a budget that isn't only balanced but in surplus to accumulate resources in order to pay for the reforms we have to make," he said. "Reforming the pension system is complicated and pricy. It doesn't need to happen tomorrow, but it must happen."

An early round of reforms on the pension system was implemented Jan. 1, which updated the system by gradually raising the retirement age to 65 for men and women without children and increasing the required number of years a person must be employed before receiving a pension from 25 to 35 years, among other reforms.

Štěpánka Filipová, spokeswoman for the Labor and Social Affairs Ministry, said the reforms have gone smoothly thus far but emphasized a complete reform is a long-term government priority.

"The pension system reform should be implemented as a permanent and continuous evolutionary process without dramatic upheavals," she said. "The essential prerequisite for a successful continuation of the pension reform is to reach the widest possible agreement on further reform on a social and political level."

- Petr Cibulka Jr. contributed to this report.

Stephan Delbos can be reached at
sdelbos@praguepost.com