ARE THIS COUNTRY’S PENSIONS ACTUALLY UNDERFINANCED? AN OCFC STUDY SHOWED THAT, ONCE PENSION TAXATION AND DEMOGRAPHICS ARE FACTORED IN, THE CZECH REPUBLIC IS AT THE EU AVERAGE

ARE THIS COUNTRY’S PENSIONS ACTUALLY UNDERFINANCED?  AN OCFC STUDY SHOWED THAT, ONCE PENSION TAXATION AND DEMOGRAPHICS ARE FACTORED IN, THE CZECH REPUBLIC IS AT THE EU AVERAGE

Pension expenditures in the Czech Republic are the eighth lowest in the EU, in relation to gross domestic product.  Whereas the EU28 states expended an average of 9.2% of GDP on pensions in 2017, it was only 6.9% in this country.  In discussions about pension system change, opinions can be heard, based on this data, that the problem of the long-term sustainability of the Czech pension system, and in turn all public finance is not fundamental, when seen in an international comparison.

But as shown by a new information study ‘International Comparison of Public Expenditure on the Pension System’ drawn up by the Office of the Czech Fiscal Council, that is an excessively simplified view.  “A simple international comparison of pension expenditures is greatly distorted.  Countries differ in a number of parameters that have an impact on the volume of public pension expenditures.  The fact that a country expend a greater share of its GDP on pensions than the Czech Republic need not mean that there is significant space for increasing public expenditure on pensions in the Czech Republic,” says one of the study’s authors, Chief Analyst of the Office of the National Fiscal Council Michal Hlaváček, pointing, for example, to the fact that the Czech Republic is one of the few countries in the EU28 where, with rare exceptions, no taxes or social security are collected from pensions. 

The amount of public expenditure on pensions is also influenced by other factors, some of which are not at all influenced by political decisions.  An example is the demographic structure of the population.  In countries that have advanced to a later stage of population ageing than the Czech Republic, old-age pensioners represent a greater share in the overall population.  Higher pension expenditures in proportion to GDP can therefore be expected in such countries.

This data indicates that a simple comparison of gross pension expenditure is misleading and that it cannot be concluded that the pension system in the Czech Republic is underfinanced compared to other countries, on the basis of that comparison.  Comparable data could only be obtained by simulating the amount of pension expenditure in individual EU countries, if pensions were not taxed in any of the countries, and if the countries had identical demographic structures, the same compensation ratio, and the same share of worker compensation in GDP.

The Office of the Czech Fiscal Council did conduct such a simulation in its information study.  The resulting data shows that, once cleansed of the ageing of the population, taxation, and worker compensation in GDP, the amounts of expenditures on pensions in the Czech Republic is average, as compared to other EU states and does not deviate in any way.  In the case of countries with significantly higher gross expenditures on pensions than in the Czech Republic (France, Austria, Portugal, Italy), the difference between them and the Czech Republic drops from an average of 5.2 p.p. to 2.6 p.p. when cleansed, i.e., by half.  After cleansing, some countries that reported higher gross pension expenditures than the Czech Republic report a lower share of expenditures on pensions than the Czech Republic.  These include Sweden, Denmark, Germany, and the United Kingdom. 

Overall, higher gross expenditures on pensions, as compared to those in the Czech Republic, are, in the vast majority of countries, explicable by their taxation, older population, and a higher share of worker compensation.  Given the expected ageing of the population and with increased economic convergence in the Czech Republic, the share of gross expenditures on pension in GDP will gradually increase towards values customary in those countries.  “Lower gross pension expenditures in the Czech Republic therefore cannot serve as a relevant argument for stating that there is significant room in the Czech Republic for increasing public expenditure on pensions, for example, in the form of greater increases in the compensation ratio or reduction of retirement age,” says Hlaváček in commenting on the findings of the study.