The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of the Czech Republic 2006 published on 8 June 2006.
The five pensions proposals made in 2005 provide a good basis
for a final decision on reform
A welcome effort to establish consensus on pension reform has been made. Five proposals (one by each of the main political parties) were developed by a special working group on pensions in 2005, a process which helped considerably in ensuring that the proposals were detailed on a comparable basis. Indeed, this transparent approach has much to recommend it for an issue as fundamental to society as a whole as pension reform. A wide range of options is covered and the proposals should be used as a basis for the final decision on pension reform that ought to be high on the agenda of the next government. One proposal introduces a system of notional accounts, a second keeps a pay-as-you-go pension but carves out a defined-contribution pillar from it, a third reform proposes only parametric changes to the current pay-as-you-go pension while a fourth proposes a flat-rate pension. The fifth proposal is similar to the third but adds a defined-contribution component to a pay-as-you-go pension.
Some aspects of the reform proposals could be improved without undermining the core approach embodied in each of them. In particular, in terms of financial stability the proposals could be strengthened by an automatic, rather than a discretionary, procedure for adjusting pensions in payment.
Other aspects of the proposed pension systems are however inherent to their design, most importantly the strength of the pensions-earnings link and the extent of public provision for retirement. The proposal for a defined-contribution add-on and the notional-accounts scheme have the greatest emphasis on the pensions-earning link by ensuring a high pension replacement rate at all levels of previous earnings. The key issue in deciding on the appropriate strength of the link is the degree to which the state should require individuals to save for their retirement because they are myopic and, left to their own devices, would make inadequate provision. Proponents of a stronger link between pensions and earnings also argue that it increases incentives to work and to contribute to pension savings (because contributions are seen less as an implicit tax). These advantages however have to be weighed up against the fact that, as crafted, these proposals entail high contribution rates and a large government involvement, while not fully addressing social safety net issues.
The tax treatment of pensions and welfare payments were not covered by the 2005 working group. However, these issues needs to be addressed, particularly the system of subsidies and tax allowances on voluntary contributions to private pension funds, which currently generates little saving. Reform needs to take into account the growing international evidence that tax incentives are often costly and ineffective in inducing more saving.
The five pension proposals mesured against six criteria
How to obtain this publication
The Policy Brief (pdf format) in English and Czech can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of the Czech Republic 2006 is available from:
For further information please contact the Czech Republic Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Philip Hemmings and Alessandro Goglio under the supervision of Andreas Wörgötter. The drafting team was assisted by Lubomir Chaloupka (on secondment from the Czech Ministry of Finance) and Edward Whitehouse (OECD pensions specialist).