The existing pension system in the Czech Republic is sustainable in the long-term but at the expense of a significant decline in the standard of living. Without interventions in the system, the ratio of an average pension to an average wage would drop profoundly below the current 40%. On the other hand, retaining the existing ratio value would result in the pension system reporting deficits, the amount of which would not be sustainable in the long-term. These are the result of Deloitte’s analysis “What will pensions be like?” The analysis explores two possible scenarios of the future development of the Czech pension system.
Scenario #1: Without changes in pension system parameters
The first scenario of the future of the Czech pension system shows that the existing setup is basically sustainable. However, this would be at the expense of a gradual devaluation of the ratio of an average old-age pension to an average gross wage.
“In 2070, the adjustment of pensions will cause a decrease from the current 40% down to 25%, which is the level of today’s Estonia. Average monthly income would thus decrease, on average, to a quarter upon the commencement of old-age pension. Despite such a sharp drop in the ratio value, the current setup of the system would at least retain the pension purchasing power as they are adjusted to reflect inflation and half of real wage growth,” says David Marek, Chief Economist at Deloitte and co-author of the study.
Scenario #2: Retaining the ratio of an average pension to an average pension at 40%
If the government sought to retain the existing ratio at 40% without any changes in the system parameters, the costs of pensions in 2055 would grew from today’s 8.3% of GDP to 10.5% of GDP. This is caused by a growing number of pensioners and a decreasing number of working age population.
In this scenario, the Czech pension system would experience a gradual drop until achieving a deficit of up to 1.9% of GDP (CZK 101 billion). Such an enormous deficit would not be sustainable for the Czech Republic in the long-term unless a change was made in the selected parameters of the pension system.
“Our calculations indicate that in order to retain the 40% ratio, it would be necessary to increase the pension insurance rate from the current 28% to 34% around 2060. Taxation of work in the Czech Republic is one of the highest across the EU, which is why this possibility is rather unrealistic. Alternatively, it would be possible to increase the retirement age to 69, which, however, is on the verge of human physical limits,” adds Václav Franče, Economist at Deloitte and co-author of the study.
The amounts of old-age pensions in the Czech Republic are profoundly below the EU average. In 2016, an average old-age pension in the Czech Republic amounted to EUR 407, compared to an average old-age pension in the EU of EUR 1,135. In this respect, the best standard of living is offered by Austria and the Netherlands where the old-age pensions are 37% and 34%, respectively, above the EU average.
Deloitte’s study “What will pensions be like?” is available here.
In the quantification of possible scenarios, the following assumptions were used in the analysis:
- An average pension will be adjusted based currently effective legislation (i.e. to reflect inflation and half of real wage growth);
- The retirement age will gradually increase to 65; and
- The proposed wage adjustment of approximately CZK 900 in 2020 will be approved.