THREE VERSIONS OF PENSION SYSTEM REFORM: ALL PLAN TO SPLIT THE FIRST PILLAR

THREE VERSIONS OF PENSION SYSTEM REFORM: ALL PLAN TO SPLIT THE FIRST PILLAR

The Ministry of Labour and Social Affairs and the Committee for Fair Pensions presented the basic principles of the pension system reform.  One of the fundamental building blocks of the proposal is the splitting of the existing first pension system pillar in two: the zeroth and the first pillar.

The zeroth pillar is to ensure pensioners a minimum sum that everyone will receive, as an equal amount, regardless of the amount of their previous earnings and payments into the pension system.  All that is required is that the person reach the minimum retirement age and meet the qualifying duration of insurance.  This pillar is to be financed from tax income of the state budget.

The first pillar will operate on a principle similar to that today – it will take into account a person’s previous work career.  Its financing is to be ensured from social security premium payments.

A MLSA press release indicates that the first pillar also recognises care for children, in the form of a bonus.  Another instrument that the reform will introduce will be so-called fictitious assessment income.  They will be used to factor into a care giver’s pension insurance his or her last income or average wage in the economy (whichever is more advantageous for the care giver).

Scheme of the new functioning of the pension systém:

Source: MPSV

Three variants of pension reform were presented, which will now be subject to political negotiations.  The variants differ from one another, among other things, in the amount of old-age pension paid from the zeroth pillar or the share of seniors who will live in poverty in 2040.

The variant referred to as economical expects the basic pension to amount to CZK 7,740 and net expenses on the pension system to drop.  The technical variant, in which the minimum pension would presently amount to CZK 10,500 and drop to CZK 8,710 by 2070, plans on an initial drop in net expenditure on the pension system.  In 2040, however, net expenditure in this variant would be up by 0.3%, compared to the situation if the current condition were maintained.

The third variant, referred to as fair, also plans on a basic pension of CZK 10,500, but unlike in the technical variant, the compensatory ratio of the component should not decline.  Net pension expenses would, in that case, increase by 0.2% GDP in year one, and by 2040, it would be up to 1.3% of GDP.  The fair variant also plans on a bonus of CZK 240 for every year of work beyond the age of 41 years.  The present state corresponds to a bonus of CZK 170.